US markets got off to a solid start to the week, heading back towards their record highs yesterday, with the S&P500 back above the 3,000 level for the first time in over a month, as optimism over US, China trade, and better than expected earnings announcements helped boost investor sentiment.
Larry Kudlow, the US President’s chief economic advisor helped the positive mood by saying that good progress was being made in the talks and raising the prospect that the December tariff hikes could be shelved if progress continued in the current vein.
European markets also had a good session as the prospect of a no deal Brexit receded into the distance, with the German DAX closing at its best levels in over a year.
The pound has continued to shrug off concerns that the latest deal between the UK and EU may still get derailed after the Speaker of the House knocked back the government’s request to hold a meaningful vote yesterday, after pulling the vote on Saturday in response to the Letwin amendment.
In response the government said it will publish the Withdrawal Agreement Bill with a view to holding a vote on it later this evening. In doing so the government will be opening up the prospect that MPs, now that they feel that an extension is in the bag, will attempt to alter the bill by attaching amendments to it, like adding the requirement to force a second referendum.
MPs could if they were so minded even go as far as add further changes, like adding a customs union, in an attempt to make the bill softer, or an anti-trapdoor amendment to force an extension to the transition period if trade talks stall, now that they feel the EU will grant them an extension.
MPs should be careful not to push their luck, however as any extension they get may well not be of the kind they want, and the government could also pull the deal. Let’s not forget that Theresa May only got an initial extension until the 12th April, before it was rolled out until 31st October.
It is highly unlikely that the EU would extend again for a long period without a good reason, like a general election, for example, as they are as fatigued by the whole process as the rest of us. This also means that any extension might well come as late as on the 31st October itself, in an attempt to keep the pressure on MPs so as to keep their minds focussed on the job in hand.
It is therefore conceivable that the EU might well decide on a short extension, assuming the agreement does finally pass through the Commons, in order for MPs to use the time to pass the necessary legislation, however that also assumes that there isn’t any funny business when it comes to inserting changes, to try to dilute the bill.
The prospect of an extension has continued to support the pound which made another 5-month high against the US dollar yesterday above the 1.3000 level. For now, this appears to be acting as a short-term top, with markets reluctant to drive the currency too much higher given that there could be many more political twists and turns before any deal gets across the line.
EURUSD – continues to edge towards the 1.1200 area and 200-day MA, which is likely to act as decent resistance. Support currently comes in at the 1.1100 area, and below that at trend line support from the lows this month comes in at the 1.1050 area, and below that at the 1.0920 area.
GBPUSD – the 1.3020 area is proving to be a bit of a barrier in the short term and we could well see a short-term pullback towards 1.2840 in the short term. While above the 1.2840 level the prospect of further gains towards 1.3200 is a possibility.
EURGBP – the downward pressure remains on the euro, with a break below the 0.8570 level potentially opening up a move towards the 0.8410 area and the lows this year. Pullbacks need to stay below the 0.8715/20 area for further losses to unfold.
USDJPY – the 200-day MA and the 109.20/30 area appears to be capping gains for now. Support comes in at the 107.50 area, as well as the lows this month at 106.50.