The Week Ahead: “Order, order...will we see the end of the beginning for Brexit?”
Our risk dashboard for the week starting April 7 looks like being another busy one, especially for the historically quiet week after US Non-Farm Payroll data. Trade talks between the US and China will continue with the possible announcement of a summit between President Trump and Xi Jinping for late April. Wednesday could be the most volatile day in some time as we have US inflation numbers, the minutes from the March Federal Reserve meeting and an ECB Meeting – a rare non-Thursday occurrence. In addition once again, no doubt the all-consuming Brexit process will hog the headlines, with the midweek EU summit set to potentially determine whether or not there should be an extension to the Brexit deadline, the now monikered ‘flextension’.
After the much anticipated, but generally mixed US jobs report, the greenback ended up as the strongest major last week, with the safe haven swissie and yen being in the doldrums. Volatility is still lowat present seemingly due to traders not having great conviction towards any of the major currencies, given the slowing economic trends and ongoing risks. Indeed, recently the spread in net positioning either for or against the five major currencies has been remarkably slim. That said, volatility is proven to be non-random and is likely to expand following periods of contraction. So, let’s not get too lulled into this current environment as we know surprises are unforeseen and can occur very abruptly!
Brexitnegotiations took a new twist last week with PM May’s olive branch or trap, depending on which side you are on, sadly not amounting to much. The impasse on Friday was highlighted by Labour stating that “we are disappointed that the government has not offered real change or compromise”. The key focus on Wednesday will therefore be if the deadline is extended from May 22, the day before the EU elections, to June 30. We think any extension is likely to last much longer than the prime minister might want, extending the chances of some of those other options we mentioned last week. The technical undertone to cable remains soft which might allow sterling to drift lower. We do note major support at 1.2970/75 and would expect this level to hold near-term at least.
It is unlikely that the market will get any new signals from the ECB Meeting, especially after the fireworks of the previous rendez-vous. European macro data is still weak even as global indicators have picked up. The March minutes confirmed that policymakers are worried about ongoing downside risks and split over whether to provide even more policy support. We should see this cautious tone reaffirmed by Mario Draghi with no specific details on the new financing operations (TLTRO3) and any possible tiering system. EUR/USD was effectively little changed on last week though price action once again failed to hold losses below 1.12.
Finally, turning our attention Stateside, focus will be on the FOMC minuteswhich should give us some colour on what were major policy shifts at the meeting. Updated perspectives on the headwinds to the global outlook and this year’s improved market tone will be of particular interest. What may it take for Powell & Co to deviate from their current ‘patient’ stance?