Anyone expecting fireworks in the wake of the triggering of Article 50 yesterday would have been rather disappointed by events as the pound, after an early slide, managed to hold up rather well, as the day wore on.
As for European equity markets they barely blinked, closing higher with the DAX closing in on the all-time highs seen in 2015 just below the 12,400 level.
The tone of the UK’s letter was, as expected, conciliatory in nature, as was the response of Donald Tusk as he stated that the EU would now consider the letter and would in due course draft its response with respect to its negotiating guidelines.
In a sign that not everything is likely to be smooth sailing it was reported that German Chancellor Angela Merkel was not prepared to countenance parallel talks on the divorce as well as the trade deal. It almost makes you wonder whether the Germans, or the EU for that matter even want to be constructive.
It is therefore sensible that Theresa May in a controversial move in some circles put all options on the table, including security in the mix as part of the negotiations.
There is cause for optimism in that the option of a three year extension is available, and in a clear carrot to the “Remain” side the option to change our minds was kept on the table, though the rest of the EU would have to agree.
One thing is certain the politics are likely to trump the economics which makes the potential for a miscalculation even more likely, and prompt an event that would cause damage to both sides.
For now the UK will have to wait for a much more detailed EU response with an outline likely by the end of the week and a detailed response at an EU summit at the end of April.
This means the pound is likely to stay quite choppy, while businesses look to lobby politicians to try and get the best deal possible.
In the US stocks closed mixed with the Dow closing lower, though the S&P500 did close slightly higher helped by a rebound in energy prices, after gasoline inventories fell more than expected.
After the declines and subsequent and pullback yesterday investors appear unsure as to what will happen next with respect to the Trump administrations next policy move. Will they try and revive the health care bill or move on to the trickier subject of tax reform.
On the data front eyes will be on the final iteration of US Q4 GDP which is expected to rise slightly to 2%.
The US dollar also got a lift yesterday as two more Fed officials, vice chairman Stanley Fischer and Chicago Fed Chief Charles Evans both agreed that another 1 to 2 rate rises seemed likely this year.
The euro slipped back as a result of some uncertainty about the next policy move of the European Central Bank. At the last press conference markets were left with the impression that the ECB might start tapering sooner rather than later. This now appears to be a message that they don’t want to push too far quite yet, particularly since there has been some softening of inflationary pressure in some areas.
EURUSD – after failing to break through the 200 day MA and seeing a bearish daily reversal, we’ve drifted back lower dropping back towards 1.0750 with the potential to head towards the 1.0680 area. Above 1.0900 targets the 1.1000 area.
GBPUSD – the failure to consolidate above the 1.2600 area has seen the pound drift back after this week’s bearish reversal, and for now we have found support around the 1.2380 area initially. A break of 1.2380 could see a return to the 1.2200 area.
EURGBP – we failed at the 0.8735 area and drifted back down again, finding support back at the 0.8620 area. A break either side is likely to determine the next move which could well be a move lower towards 0.8550. Above 0.8730 we could head back towards the highs at the 0.8800 area.
USDJPY – while below the 111.60 area the bias remains for a move back to the 110.00 area. The US dollar needs to get back above the 111.60 area to stabilise and head back towards 112.50, or risk a move towards 108.50.
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