Sterling dragged back into the spotlight

May 2, 2017 10:27 AM

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The potential threat of complications and confrontations during Brexit negotiations could rekindle hard Brexit fears and expose Sterling to downside risks this quarter. Some difficulties have already materialized in the early stages of Brexit talks with European Commission President, Jean-Claude Juncker recently commenting that UK Prime Minister Theresa May is “living in another galaxy”, leaving investors anxious. Theresa May repeating her threats of walking away from the European Union without a deal has contributed to uncertainty, and as such Sterling vulnerability could become a dominant theme.

There is a growing suspicion that the European Union may exploit the complicated process of Brexit negotiations to demonstrate to other members that leaving the single bloc may come with heavy consequences. With Brexit developments and ongoing political instability likely to weigh on sentiment, sellers may attack the Pound moving forward.

Focusing on the macro fundamentals, Sterling popped higher during Tuesday’s trading session after UK manufacturing surged to a three-year high in April at 57.3. A vulnerable Pound boosted the competitiveness of British products globally, and with manufacturing accounting for 10% of the economy, a solid release was warmly received. Although Sterling could find itself supported in the short term, the upside may be limited, especially when considering how the toxic combination of accelerating prices and Sterling weakness continues to impact consumers.

From a technical standpoint, Sterling/Dollar is bullish in the short term with the breakout above 1.2875 opening a path towards 1.3000. If bulls fail to conquer the 1.3000 level, then prices may descend back towards 1.2875 and 1.2775 respectively.

Stock markets buoyed by earnings
Global stocks crept higher on Tuesday as investors looked beyond the ongoing geopolitical tensions and uncertainty, focusing on stronger corporate earnings. Asian stocks concluded mixed during early trading on Tuesday with some investors on the fence after soft economic data from China rekindled concerns about the global economy. In Europe, equities opened cautiously higher as participants prepared for an explosive data-packed week with the Fed meeting, U.S. jobs data and the French presidential elections in the limelight.

Although Wall Street may find itself supported by earnings, an air of caution permeating the financial markets may cap gains. With uncertainty still lingering over President Trump’s economic policies, geopolitical tensions in the background, and depressed oil prices weighing on sentiment, the “sell in May and go away” strategy could become attractive to anxious investors.

Dollar losing its attitude
Dollar bears have been unleashed by the recent string of soft economic data from the U.S., leaving investors questioning whether the Federal Reserve will raise U.S. interest rates again this year. The Trump rally continues to display signs of exhaustion as skepticism mounts over Donald Trump’s ability to move forward with the proposed fiscal spending. Although markets reacted to a big tax announcement last week that offered little detail on the tax reform, it must be kept in mind that support for the proposed reforms does not mean they will be passed through congress.

Much attention may be directed towards the Federal Reserve meeting and U.S. jobs data this week which could create some dollar volatility. While markets widely expect the Federal Reserve to leave interest rates unchanged in May, investors may scrutinize the meeting’s tone for any clues or confirmation of a June interest rate increase.

Commodity spotlight – Gold
Gold bulls have succumbed to selling pressure by losing the battle to defend the $1,260 support. While the metal could still be supported by risk aversion in the medium to longer term, the break below $1,260 may entice sellers to send prices towards $1,240. The metal may be subject to volatility this week with the Federal Reserve meeting on Wednesday, and NFP on Friday acting as prime drivers. From a technical standpoint, previous support around $1,260 may transform into a dynamic resistance that opens a path towards $1,240. In an alternative scenario, a daily break back above $1,260 could provide bulls the opportunity to challenge $1,280.

About the Author

Lukman Otunuga is an FXTM research analyst