Market Analysis: 28 March 2017
by Christala Parmaxi
The Pound was the best performing currency on Monday; the Cable appreciated at around 500 pips over the past 10 trading days. The British Pound has already fully discounted Brexit and it is official that Theresa May will trigger Article 50 on Wednesday. Moreover, the stance of the BoE has turned to hawkish. In our view, the GBP may fall rapidly during the announcement but it is likely to recover in a small interval of time due to the already priced in Brexit information reflected in Pound and the falling US Dollar. In the longer term though, we need to keep an eye on the fundamentals such as the terms and conditions behind the real Brexit between UK and EU. David Davis, the Brexit Secretary, said that UK is not going to pay the GBP50 Billion divorce bill. It’s worth keeping in mind that the EU is Britain’s biggest trading partner and thus the trading deal between the two unions will affect the Pound’s direction significantly. In the meantime, Scotland’s Parliament is going to vote today for the independence referendum from the UK. The vote is expected to shake the Pound.
As an unscheduled OPEC meeting took place on the weekend, its participants stated that they will stick to their plans to cut the production and the lower oil prices so far are due to high inventory and not a negative reaction to the production cut plans. However, the meeting did not affect oil prices which are still falling and subsequently the Canadian Dollar is falling too with the USDCAD reaching a 2-week high today slightly above 1.341.
There is already evidence that President Trump is not able to fulfill his campaign promises since he did not manage to replace Obamacare. Trump was unable to get enough support even from his own Republican party to “repeal and replace” the Obamacare health insurance reforms. The next step now for Trump is the tax reforms and infrastructure spending bills while the media are talking about the reversal of the “US reflation trade”. If the President is incapable of reforming taxes and infrastructure, then the Fed rate hike in June will be questioned as well. The Fed Chairwoman Janet Yellen is having a speech today while more Fed officials will speak during the week; Robert Kaplan and Esther George will speak on Tuesday, Eric Rosengren and John Williams on Wednesday, Loretta Mester on Thursday, Neel Kashkari and James Bullard on Friday. The Fed Funds Futures gives a 43% probability to June rate hike at the moment while last week the likelihood was around 46%. Despite Fed’s hawkishness, the political side is against the US Dollar’s performance at the time being.
EURUSD opened with a gap higher on Monday reaching 1.09 while USD started Monday lower against the G7. However, USD gained some of its losses during the Asian morning today with the world’s most traded currency testing 1.084 which coincides with SMA50 and Bollinger’s lower band at the time of writing. Despite the declining slope, MACD and RSI are still in bullish territories suggesting long positions. Despite the gap, our view remains bullish on the pair buying the corrections up to the resistance of 1.09. The risks to the downside are near 1.084 and 1.08 in the near term. In the long-term it is worth noting that the current levels of the pair, 1.09, are near the election levels of November 8th 2016, which is a significant sign that the Trumpflation trades are near the end.
The Cable reached the critical psychological level of 1.26 yesterday which is a 3-week high. The overall sentiment on the Pound is bullish with the support of SMA50 holding strong on the 4-hour chart. Furthermore, it is worth mentioning that there were bullish crosses between SMA50 and SMA100, SMA200 which are strong bullish signals. The next valid bullish target is the psychological resistance of 1.27 while the downside risks are near the supports of 1.252 and 1.245.
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