While most currency pairs were trading within tight range this week, sterling outperformed other G10 peers as the likelihood of a delay of Brexit or a second referendum rises.
The government and parties are seeking all options to try to avoid a ‘no-deal’ Brexit due to the disastrous consequence it could bring to UK’s economy and reputation. To mitigate the tail risk of ‘no-deal’ Brexit, the cabinet needs to either seek extension of Article 50 or start a second referendum. Theresa May’s ‘Plan B’ is apparently not concrete enough to win support from the MPs nor the Brussel side, therefore I believe the likelihood of delay and even reverse of Brexit is rising.
Pound had a decent ‘relief rebound’ over the past two weeks, as markets start to price-in a possible delay in Brexit and a second referendum after years of political chaos. Technically, GBP/EUR is challenging an immediate resistance level of 1.160 and its next resistance level can be found at 1.165 area. Momentum indicator RSI has risen to the 80% area, suggesting the market has probably been temporarily overbought. GBP/USD has been riding a strong uptrend since early January, and this trend remains intact. Its immediate resistance level can be found at around 1.317 area, which is also a 38.2% Fibonacci retracement level.
Last night, the ECB kept its policy rate unchanged as expected. Governor Mario Draghi cautioned about risks to the downside, and said stimulus is needed to sustain inflation. A dovish-biased ECB statement will cap the upside of euro.
Eurozone manufacturing PMIs largely missed expectation, with Germany’s reading tumbled to 49.9 – into the contraction territory – for the first time in five years. This contrast with earlier forecast of 51.5, highlighting the slowdown in business sentiment is probably much worse than economists had expected. Trade and political uncertainties weighed on investment sentiment and business capex, leading the manufacturing PMIs to head into contractor territory in China, Japan and Germany. The Eurozone manufacturing PMI reading has fallen at a faster-than-expected pace for the past 13 months, from peak of 60.6 to latest reading of 50.5. Tepid PMIs painted a tepid picture of business activities, trades and corporate earnings in the manufacturing sector, and urge policy makers to adopt accommodative monetary and fiscal stance to support economy.
Brent crude oil prices may be under pressure as the US commercial oil inventory surged 7.97 million barrels last week, according to DOE weekly petroleum status report. This contrasts with market forecast of a 0.27 million barrels drop. Unexpected surge in crude stockpile reflects the fact that slowdown in demand and climb in shale oil output is obstructing the market from reaching a balance in supply-demand. Brent oil price has consolidated for a fourth day to the US$60.9 area, and its momentum indicator MACD is about to form a bearish crossover.
Crude Oil Stock (net change)
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