Hopes for Avoiding No-Deal Brexit Boosted Risk Appetite, US Inflation Data in Focus

Geoffrey CoxAsian equities fell on risk averse trading activity, but hopes for UK parliament voting against no-deal Brexit outcome helped European markets erase early loss. Investors now eye US macro data for directional cues.

Summary: Global market today saw mixed price action in equity and forex markets owing to dovish cues from yesterday’s disappointing US CPI update and Brexit woes. Following comments of UK attorney general Geoffrey Cox a fresh wave of dovish price action hit global market and this was intensified following rejection of PM May’s Brexit deal in UK parliament. EU members viewed rejection of May’s deal in negative light and retaliated stating that any request from UK to extend article 50 deadline will only be granted if proper justification for request is provided by UK. EU has already begun preparations for no-deal Brexit scenario while PM May’s intentional delay tactics has left UK without any time to prepare for disorderly Brexit. Asian markets today morning saw dovish price action as investor sentiment turned risk averse today and European equities opened with dovish tone as well, however hopes for UK parliament to vote against no-deal Brexit scenario and aim to second Brexit referendum has influenced positive price action in European equity market ahead of UK parliament session today. Since a no-deal exit would be devastating for both economies, traders believe that in case of UK parliament voting against no-deal outcome, UK & EU would work out some sort of compromise or move to reverse Brexit and this is providing some level of support in late European market hours.

Precious Metals: Both gold and silver traded positive in spot and futures market today. US Dollar in which the precious metals are denominated lost strength on yesterday’s disappointing US CPI data and this helped improve participation from emerging markets. As Brexit woes remained high and Asian market hours saw risk averse trading activity, gold and silver saw solid gains on increased safe haven demand and the yellow metal managed to reclaim hold over $1300 handle hitting a new two-week high earlier today.

AUD/USD: The pair saw slight downside move during Pacific-Asia market hours and fell sharp hitting intra-day lows over dovish cues from US Wall Street and Chinese equity markets. But gained momentum and traded with slow but steady upside influence across the day on US Dollar’s weakness in broad market. Investors now await US macro data outcome for directional bias and disappointing US macro data will help the pair erase early loss and post solid gains during American market hours.

USD/JPY: The USDJPY pair saw two-way price action today as the pair fell during Pacific-Asian trading hours on dovish influence from yesterday’s worse than expected US CPI data and risk averse trading activity in Asian markets influenced by concerns of global economic slowdown and Brexit woes. However, hopes for UK parliament voting against no-deal outcome improved risk appetite in European market and this lead to pair erasing early loss and moving back near previous session highs where it is trading range bound await US macro data updates. Positive performance of European and US equities till end of session would lead to USD regaining upper hand during American market hours.

EUOn The Lookout: The majority of focus of global investors and traders in short term is on US macro data scheduled to release for the day as the outcome of same will help USD gain a directional bias for price action for remaining trading sessions of the week. However, the main focus still remains on UK parliament session as key decisions relating to Brexit is still under consideration and is expected to be vote upon during parliament meeting today and tomorrow. While EU has stated that they are unlikely to grant extension for Brexit deadline unless UK provides credible justification as EU members view rejection of the deal in negative light. However, if UK parliament rejects no-deal exit outcome and votes on extension of deadline during tomorrow’s meeting the request is likely to be granted by EU for a short duration as disorderly Brexit will lead to huge economic losses on both sides. Further, investors hope that UK lawmakers would push for second Brexit referendum as current scenario suggests that Brexit will lead to irresolvable mess which may extend indefinitely. Any news of second Brexit referendum will not light fire under market bulls while just avoiding no-deal exit and extending deadline will lead to range bound price action for rest of the day. On release front today, US macro calendar will see the release of PPI, core durable goods order and Crude Oil inventory data.

Trading Perspective: As hopes to avoid no-deal Brexit boosted risk appetite, European equities are likely to close positive. Forex market will see range bound action on risk averse trading as weak USD in broad market continues to limit downside move. The outcome of US macro data will provide directional bias for major forex pairs and Wall Street indices.

US Index Futures: US stock index futures trading in international markets displayed a flat tone ahead of Wall Street market opening. The flat price action was neutral as investors were sceptical owing to mixed cues from Asian and European markets over risk averse trading activity, Brexit woes and Boeing stocks decline owing to safety concerns and ban for 737MAX flights in India. Investors await macro data outcome to get a complete picture on US inflation data for clue on directional bias before placing major bets. Since Risk appetite returned in European markets on hopes to avoid no-deal Brexit outcome lifting significant dovish influence from market Wall Street is likely to see positive opening today.

EUR/USD: The pair has a subdued start for the day on Brexit woes but gained upper hand as Euro area industrial production data saw better than expected outcome providing fundamental support to market bulls. Further hopes for UK lawmakers voting against no-deal Brexit outcome boosted risk appetite in market and influenced positive price action in European equities reversing early losses ahead of US macro data outcome. This suggests that the pair is likely to see continued positive price action is US data disappoints or consolidate near intra-day highs in case of positive US macro data outcome post which it will continue with ongoing rally for rest of the day.

USD/CAD: The USDCAD pair today saw dovish price action as Crude oil price continued to remain strong for fourth consecutive trading session supported by multiple factors. This gave CAD bulls strong support to establish a downside price rally which was further supported by increased risk appetite in late European market hours and weak US Dollar in broad market owing to yesterday’s disappointing US CPI data resulting in pair hitting one week lows. Investors now await US macro data outcome and positive macro data outcome will lead to range bound action above mid-1.33 handle for rest of the day while dovish macro data outcome will lead to further declines with possibility to fall below 1.3300 handle in American market hours.