Sterling Shines on Rising Brexit Optimism

  • Markets are mostly quiet as fresh drivers are awaited
  • The main event today will be Powell’s semi-annual Humphrey-Hawkins testimony before the Senate
  • It seems a Brexit delay is becoming more and more likely
  • Tensions between India and Pakistan remain high
  • National Bank of Hungary is expected to keep policy steady

The dollar is mostly firmer against the majors ahead of Powell’s Humphrey-Hawkins testimony.  Sterling and yen are outperforming, while Loonie and Aussie are underperforming.  EM currencies are mixed.  HUF and KRW are outperforming, while ZAR and RUB are underperforming.  MSCI Asia Pacific was down 0.4%, with the Nikkei falling 0.4%.  MSCI EM is down 0.3% so far today, with the Shanghai Composite falling 0.7%.  Euro Stoxx 600 is down 0.1% near midday, while US equity futures are pointing to a lower open.  10-year UST yields are flat at 2.66%.  Commodity prices are mostly higher, with Brent oil up 0.5%, copper up 0.3%, and gold down 0.1%.

Markets are mostly quiet as fresh drivers are awaited.   The dollar is mostly firmer but in very narrow ranges, whilst sterling is outperforming on signs that Brexit may be delayed or perhaps even reversed (see below).  Global equity markets are mostly softer as recent optimism over US-China trade talks fade, while core bond yields are flat to lower.

The main event today will be Powell’s semi-annual Humphrey-Hawkins testimony before the Senate.  He will testify before the House Wednesday.  Not much has changed since the January 30 FOMC meeting, and so we expect Powell to stick to the “patience” and “flexibility” mantra.  The next FOMC meeting is March 20 and a pause then is a foregone conclusion.

More Fed regional surveys for February will roll out this week.  Last week, the Philly Fed survey came in at -4.  On Monday, Dallas Fed reported at 13.1 vs. 4.7 expected.  Today, Richmond Fed reports (5 expected) and Kansas City reports Thursday (6 expected).  These are secondary to the Chicago and ISM readings but should help round out a fuller picture of the US economy here in Q1.  Today, the US also reports December housing starts and building permits.

It seems a Brexit delay is becoming more and more likely.  After flying to the EU summit in Egypt, UK Prime Minister May was basically told that Brexit must be delayed.  She has been playing up a no-deal Brexit as the only alternative to her own deal, but the EU is having none of it.  Indeed, opposition Labour leader Corbyn said that he would support a second Brexit referendum.  May and her cabinet will reportedly discuss a delay today.

Sterling remains bid on the hopes that a no-deal Brexit can be avoided.  Cable is trading at its highest level since October 16 and is on track to test the October 12 high near $1.3260 and then the September 20 high near $1.33.  Sterling is outperforming the euro and so the EUR/GBP cross has fallen to the lowest level since May 2017.  The April 2017 low near .83140 is the next major target.

The yen has underperformed recently as ongoing “risk on” sentiment takes its toll.  USD/JPY traded yesterday at its highest level since December 27 and is coming up on the 200-day moving average near 111.30.  That is the last major barrier before the pair tests the December 13 high near 113.70.

Tensions between India and Pakistan remain high.  Indian jets reportedly attacked and destroyed a terrorist camp in Pakistan.  Pakistani Prime Minister Khan said that his nation would respond “at a time and place of its choosing” but rejected Indian claims that it had destroyed a major terrorist base.  India’s actions were in response to a terrorist attack in its paramilitary forces last month in Kashmir.

National Bank of Hungary is expected to keep policy steady.  CPI rose 2.7% y/y in January, within the 2-4% target range but at the cycle lows.  Low price pressures should allow the central bank to maintain steady policy this year.