Pound Roars Back, PM May Survives Leadership Challenge

Summary: The British Pound roared back in typical fashion as UK Prime Minister May survived a crucial leadership challenge. After plummeting to a fresh low not seen since April 2017 (1.2477), Sterling jumped to finish in New York at 1.2630. The Euro climbed back to the higher end of its recent range ahead of tonight’s ECB policy rate meeting, the last for 2018. The Dollar Index (USD/DXY), where the Euro and Sterling carry a combined weight of 69.5% slid 0.40% to 97.065 (97.455 yesterday). US Headline and Core CPI for November matched expectations.
Wall Street led global stocks higher lifted by a more positive trade outlook. Donald Trump said he would use his influence to calm the Huawei executive’s arrest as part of a deal with China. The DOW ended 1.27% higher while the S&P 500 gained 1.25%.

  • GBP/USD true-to-form as one of the world’s most volatile major currencies, Sterling roared back 1.2%. PM May won the confidence vote with the numbers required for a simple majority (200 for, 177 against). The Pound which hit a high of 1.2670 just ahead of the confirmation, slipped back to 1.2615 immediately following the news of her survival. However, May still faces an uphill battle to get her Brexit deal through Expect more volatility ahead.
  • EUR/USD the Euro bounced back to finish at 1.1365 after testing the lower end of its recent range at 1.1315. EUR/USD traded to an overnight high of 1.13873. The ECB meets on monetary policy for the last time this year. The European Central Bank is expected to confirm its plan to end Quantitative Easing at the end of the year. Traders are still at a query as to when Mario Draghi and his colleagues will lift ultra-low interest rates. The Main Refinancing Rate is expected to stay at 0.00%. The yield on Germanys 10-year Bund rose 5 basis points to 0.28%.
  • US Ten-Year Bond Yield – rose 3 basis points to 2.91%. Other global yields were also higher. The Federal Reserve has its final policy meeting next week. Despite a recent dovish tilt, policymakers are expected to raise the Fed Funds rate another 25 basis points. The 10-year yield saw a low close of 2.85% earlier this week where it has since pulled back. Any bounces will be limited to 2.95-3.0 %.

On the Lookout: Markets will watch for further developments on the trade and Brexit fronts. Meantime the risk of a US government shutdown grows as President Trump is at odds with leading Democrats over the funding of his plans to build a border wall with Mexico. Every December, this threat of a US government shutdown (for whatever reasons) occurs.
Events and economic data releases today are: UK RICS House Prices, German Final CPI (November), Swiss National Bank’s Monetary Policy Assessment Meeting and Libor Rate (expected to stay at -0.75%), ECB Main Refinancing Rate and Press Conference and finally US Weekly Jobless Claims.

Trading Perspective: Expect more range trading in the Dollar Majors with Sterling still likely to remain the most volatile. Market positioning will figure more prominently as traders jockey to adjust positions into the year-end ahead of the Christmas holidays.

  1. GBP/USD – Sterling managed a high of 1.2670 before dropping as PM May survived the confidence vote to 1.2615. She faces an uphill battle to convince her party as well as those in the opposition to accept the Brexit deal she struck with the European Union. After yesterday’s big move, we can expect some consolidation, albeit within a wide range. Immediate support can be found at 1.2600 and 1.2550. On the topside, initial resistance lies at 1.2670 and then 1.2720. Lets not forget that the speculators are short of Sterling. If the 1.2500 level holds, and we see a weaker overall US Dollar, we could see a squeeze higher in the Pound. Expect more volatility ahead.
  2. EUR/USD – The downside test of 1.3515 held with the Euro falling short of 1.1400. With the differential between European and US rates narrowing, and the prospect for more, EUR/USD has found a base at 1.1300. The Euro was boosted by news that Italian PM Conte proposed a 2.04% deficit target for 2019. The focus will be on the ECB’s plans to nudge up it’s ultra-low interest rates at its meeting later today. Most traders are expecting no new guidance on the ECB’s first rate hike. Expect the Euro to hold the 1.1300 support zone on the back of generally weaker Dollar and a short speculative Euro market.
  3. US S&P 500 – with a more positive trade outlook, stocks had a strong rally before easing at the close. The S&P 500 traded to a high of 2685 before slipping to close at 2663 (2645 yesterday). Technically any bounces should be limited to 2680. A break on the topside of 2700 could yield 2740. The 2640 level should hold and a rally to the 2700/40 level is likely. Preference is to sell the rally to 2740.