Markets poised for a busy fortnight ahead

During the course of this week and next there are some key events that could have a significant impact on how the currency markets unfold into the end of the year. Tomorrow that all kicks off with the outcome of the UK Brexit vote in parliament.

Whilst there’s virtually no chance of that vote, in its present form getting through the house, its not an absolute given that it won’t, considering that this is after all; a fait accompli situation. Leaving aside the political outcome itself; the focus here is how the currency reacts to whatever that outcome is. There are still quite a few permutations on that of course, but gradually those do appear to be narrowing down and increasingly none of them look very positive for the pound.

Meantime and in advance of that decision, the GBPUSD is still managing to hold above, what is now potentially a key support area at 1.2660. If you take a look at the chart below which I peeled off late yesterday evening, you can see this point is denoted by the red parallel line that I have drawn on.

Now, this level defined the bottom of the sell-off back in August and then again just last week, but a daily close below 1.2660 now could open a path to markedly fresh lows. On the other hand, if the price continues to hold above this level, then it could set up another rebound, perhaps back above 1.3000 again.

I think its entirely understandable, that under the current outlook circumstances, the price is only managing to hold water just above this low. Having said that, such price suppression also sets up the potential for a sizeable relief rally.

So, the question is whether or not there is any political outcome that can provide the right catalyst for such a rally to unfold? Well, in all honestly, its hard to see anything in the short term and besides looking further out; the door is still wide open to more political uncertainty and potentially a new government.

Anyway, I suppose in terms of gauging the next move for the pound, it’s very much one step at a time. That’s exactly what this situation warrants right now and second guessing what the politicians might do next is almost impossible because the truth is; they don’t even know themselves!

So, I watch and wait like the rest of the market to see if this glass is half empty or half full. Meanwhile, the pound isn’t the only currency high on the radar this week because on Thursday the ECB will announce exactly how they are going to end their bond buying program whilst leaving all their benchmark rates unchanged.

Most recently, over the past 6 weeks, the EURUSD has been trading in a very right range, roughly in between 1.13-1.15 with a bit of give and take on either side. I must admit that the recent price is giving a very good impression of something that is trying to base build around that range.

I suppose the strangest thing of all over the past month has been failure of the EUR to yet benefit much from the drop back in US bond yields. During this period the 10year yield has fallen back from around 3.25% to the current 2.85% level. So, clearly the markets now fear a slowdown in 2019, not just in the US, but globally too.

So, there can be little doubt that this has presented something of a policy dilemma for ECB. Even if they do remove stimulus I think it’s safe to assume they will do this in the most dovish way they can. Leaving Brexit aside, the headwinds in and outside Europe are blowing a lot stronger now than they did earlier in the year.

That will ensure the ECB will be in no rush to raise interest rates any time soon, even if they do exit their QE policy this week. I think this point will be strongly endorsed by the ECB boss, Mario Draghi when he briefs the press at 1.30pm on Thursday.

Beyond the FX space those equity markets are sure running scared and the closes on Wall Street on Friday only served to underline that fact. Indeed, Asian markets overnight are a sea of red again too, but it’s not just the losses that are alarming, it’s the volatility that’s also unnerving many investors.

We should also remember that volatility is just as much a warning about direction as it is a deterrent to those ‘real money’ investors. This is going to make life very tricky for the ECB this week as I am sure they would rather be changing tack under much more benign circumstances than those they are currently facing.

Key economic releases due this week

11/12-  9.30am UK November unemployment report

11/12-  10.00am December German and European ZEW Economic expectations index

11/12-  11.00am November US NFIB small business optimism index

12/12-  1.30pm US November CPI inflation report

13/12-  12.45 ECB monetary policy decision- no changes to benchmark rates expected

13/12-  1.30pm ECB post policy decision press conference- QE policy decisions awaited

14/12-  1.30pm US November advanced retail sales