Traders starting to get interested in Brexit again

The pound crashed through long term support at 1.2820 versus the dollar yesterday as the reality of Brexit began to come into sharper focus. It now seems likely that the Prime Minister will step down immediately if her Withdrawal Bill fails to pass through the House of Commons at the fourth time of asking early next month.

If MPs decide that the deal Mrs May brought back from Brussels last November is acceptable, given the lack of an alternative that fulfils the referendum terms, (although that is not the generally anticipated outcome), then she will probably set her departure for some later date, likely to be the end of July to allow her successor to begin the post-departure process.

How the Government can manage the process should the Withdrawal Agreement fail is beginning to exercise the imagination of traders and analysts alike. A second referendum is the most bullish outcome for the currency while a shift towards no deal could see the pound collapse.

Next week’s European elections, hastily arranged in the UK since it was not expected to take part, will be a significant pointer for the political landscape in the country for years to come. It could be that they are seen by future generations as the catalyst for the demise of the two-Party system of Government.

Having broken support at 1.2820, the pound reached a low of 1.2787, continuing a nine-day streak of lower daily closes.

Next week’s data releases may be of interest to the Bank of England as consumer prices are likely to tick back above the Government’s 2% target. The forward-looking Industrial Trends data is expected to weaken to -6 or even -7 following the -5 read for April although is data is traditionally volatile.

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A watershed week for the Euro?

Next week will see the release of activity data for Germany and France individually as well as the composite index for the entire Eurozone. European Parliamentary elections will take place and Rome will take advantage of the situation to advance its plan to break EU rules on budget deficits.

The euro has been under pressure from a strengthening dollar but next week could be a defining moment.

Any upswing in the nationalist/populist vote in Italy will be a green light to the alliance between Five Star and The League to push forward with more radical proposals.

French Manufacturing PMI is expected to slip below the 50 level which denotes growth or contraction, German PMI is expected to pick up a little, but from the very low base of 44.4 in April. The Composite PMI for Eurozone manufacturing is likely to remain unchanged around 48.

This is not the disaster that many had feared, especially Mario Draghi, who has been predicting a turnaround during Q2. It may, however, see the euro selloff continue since the market’s patience for the promised recovery may be wearing a little thin.

Yesterday, the euro fell through the 1.1200 level that had provided support recently reaching a low of 1.1166 versus the dollar, closing at 1.1175.

Dollar receiving support from global anxieties

There is a clear desire amongst traders to buy the dollar despite the possibility that the economy may be slowing and the Fed may remain on hold for longer than had been expected.

This may in part be due to the tribulations facing the UK and Eurozone and uncertainty in Asia, but the level of growth expected in Q2 for the U.S. is likely to be stronger than most of its trading partners.

The current round of sabre rattling in the Arabian Gulf brought about by the (not yet confirmed) sabotage of four Saudi oil tankers in the Strait of Hormuz is providing a safe haven bid for the dollar index. Traders are coming around to the idea that there will eventually be a trade agreement reached between China and the U.S as it is in the best interests of both sides despite President Trump adopting a sanguine approach since raising tariffs on a range of imports last week.

Next week’s Fed minutes will provide a view on what the Fed is thinking but given that they are three weeks old and considering data from the previous month, it could be argued that they are already a little out of date. This means that until rates are hiked (or lowered) it will be difficult to gauge exactly how FOMC members are thinking.

Given the plight of the euro and pound, it is hardly surprising that the dollar index was on the front foot yesterday. It reached a high of 97.88, closing at 97.84.

Given the amount of activity expected on so many fronts next week, it is likely that the market will take a breather today. However, as has been seen many times these are the days when traders can be caught unprepared.