Pound bulls were injected with a renewed sense of confidence this morning following reports that UK Prime Minister Theresa May could delay Brexit beyond 29 March.
This development will certainly remove some element of uncertainty over Brexit whilst soothing fears over the UK crashing out of the EU without a deal in place next month. However, a major risk accompanied by extending Article 50 is that Britain will find itself trapped in a Brexit limbo. While the Pound has scope to extend gains on Brexit delay expectations, the medium to longer term outlook remains blurred by a thick cloud of uncertainty. With the odds of a second referendum also rising after Labour leader Jeremy Corbyn made a U-turn to back the move, another question floating in the air is whether there will even be a Brexit.
With just over one month left until the UK is scheduled to leave the European Union, we expect the Pound to display extreme levels of sensitivity and volatility to Brexit headlines. Although some attention will be directed towards the inflation report hearings later today, this will likely be overshadowed by a crucial cabinet meeting where the Brexit deadline will be discussed.
Focusing on the technical picture, the GBPUSD is pushing higher on the daily charts with prices trading around 1.3130 as of writing. The combination of Brexit delay expectations and Dollar weakness has the potential to push the GBPUSD towards 1.3200 in the near term.
Dollar waits for Jerome Powell
The Dollar has lost its mojo in recent days, slipping closer to the 96 psychological level due to a number of domestic and external factors.
A string of soft economic data from the United States, coupled with growing speculation over the Fed taking a break on monetary tightening this year, has brought nothing but bad news for the Dollar. The risk-on flows have also pulled investors away from safe-haven assets and currencies, which will inevitably pressure the Dollar further. Although Dollar bulls were initially supported by the economic divergence between the US and everyone else, this theme could be coming to an end.
Much attention will be directed towards Fed Chair Jerome Powell’s congressional testimony later in the day. Powell’s testimony could offer investors some additional insight into the Federal Reserve’s monetary policy stance for 2019. The central bank head is expected to reiterate that the Federal Reserve will remain “patient” on future hikes. We see the Dollar weakening against a basket of major currencies if Powell adopts a dovish tone during his testimony.
Commodity spotlight – Gold
Gold weakened towards $1,326 this morning, as US-China trade optimism sent investors sprinting to riskier assets.
Although the precious metal is at risk of depreciating further in the short term amid the risk-on sentiment, the medium to longer term outlook swings in favour of Gold bulls. For as long as geopolitical risks, concerns over plateauing global growth and speculation over the Fed taking a pause on rate hikes remain key themes, Gold is insulated from extreme downside shocks.
In regards to the technical picture, sustained weakness below $1,330 is likely to encourage a decline towards $1,318. However, bulls still remain in control above the $1,303 higher low.