Market Drivers July 9, 2018
Davis quits but pound soars on hopes of soft-Brexit
Risk on send dollar lower
Nikkei 1.21% Dax 0.16%
Europe and Asia:
The start of week’s trade was dominated by the drama from UK as Theresa May’s Brexit minister Davis resigned from her government in protest over her negotiating stance.
Mr. Davis stated that he would not be able to deliver on her position as it would involve the UK giving up too much independence on the rulemaking front in order to stay in the customs union.
Initially, the news of Mr. Davis’s departure caused a sell-off in cable on fears of a euro-skeptic revolt against the PM that could lead to a no-confidence vote and a snap election. However, Mr. Davis noted that he would not stand to challenge PM May and the market quickly realized that the exit of hard-line Brexiteers could actually strengthen Ms. May “soft-Brexit” strategy. The mood was further bolstered by news that Ms. May invited Labor legislators to the meeting today to hear her proposal in negotiations with EU.
Still, the situation in the UK remains volatile, and it’s unclear if EU will even accept Ms. May’s more conciliatory proposals. The issue over Ireland border appears to be intractable and could scuttle any potential deal. For now, however, the market is optimistic that a soft Brexit or perhaps a no Brexit solution can take place which would allow commerce in the region to proceed relatively unencumbered. GBPUSD traded to a high of 1.3360 and looks ready to run the 1.3400 level on any sign of progress.
The rise in the cable was a sign of bigger anti-dollar trend in the market, as all the majors have rallied against the buck today. The move is a continuation of the short covering rally that started last week, as risk-on flows appear to have improved. Friday’s NFP results also did not help the greenback as the rise in wages was relatively tepid at 2.7% per year indicating that while US growth remains steady, incomes are not accelerating at a pace that would require tighter monetary policy. Therefore the Fed may opt for only 3 rather 4 rate hikes this year.
With no data on the docket today the question for the market is whether North American traders will extend the anti-dollar move. EURUSD faces serious resistance at the 1.1850 level, but the longs could make a run at the 1.1800 figure if President Draghi’s remarks in front of the EU Parliament are not seen as dovish. Recent statements by ECB members regarding the wind up of QE have sent a more hawkish message to the market and if Mr. Draghi reiterates that stance the euro could easily rally to 1.1800 as the day proceeds.