Article 50 Ready To Be Delivered

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Brexit: Article 50 to be triggered today

Nine months after the Brexit vote, Theresa May will finally start the exit process by triggering Article 50 of the Lisbon Treaty. May will speak in front of the House of Commons at noon. A letter will then be delivered by 1.30pm to Donald Tusk. Negotiations should last at least two years but the UK will still benefit many bilateral agreements in the meanwhile.

The pound fell last night from 1.2460 to 1.2380 against the dollar. In our view, we believe that the markets are still overly pessimistic about the UK situation. Recent economic data is improving, but we also believe that the pound should appreciate in the medium-term. It is clear that economists widely missed the target with their doomsday prophecies and ironically, it is this very market pessimism that is supporting the UK economy by increasing the competitiveness of its exports.

Now that Brexit is officially a done deal, the next questions will revolve around the nature and tone of negotiations. 27 counterparts must accept and agree with the UK’s terms with each country holding a veto over these conditions. It is for this reason that it is so difficult for countries to renegotiate treaties in general. For this reason, we find the promise to renegotiate treaties somewhat scammy.

Pressure on oil builds

Despite the negative sentiment around oil, there are increasing indications of risk to the upside. Ian Roper Taylor CEO of Vito, the world’s largest private oil trader, has provided verbal support to OPEC production cuts. As the headlines hit, crude popped to $49, slightly above the short-term sideways channel top. In addition, Libya experienced supply disruption, which pulled approx. 140k bbl/day offline. All this comes on the back of reports that OPEC and non-OPEC nations are looking to extend oil production cuts by six months. December’s 1.8m bbl / day cut has failed to meaningfully address the demand /supply equilibria (deal product cut is estimated at 94%) and other nations (notably USA) have seized the opportunity. Crude-front month climbed to $50 bbl but quickly retreated as US shales oil producers came online (forecasts for US crude production expected to reach a decade high). The failure of current product cuts has provided a wake-up call to OPEC. A draft statement indicated that nations are working closer to reach a solution to further lift prices. Markets have been focused on shale’s low production cost and new product from Brazil and Canada, yet OPEC remains the dominant force.

The Risk Today:

EUR/USD has failed to hold above former resistance given at 1.0874 (08/12/2017 high). Hourly support is given at 1.0719 (21/03/2017 low). Stronger support can be found at 1.0493 (22/02/2017 low). Expected to show renewed bullish pressures. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.

GBP/USD has exited short-term uptrend channel. We consider that there are still rooms for further strength. Hourly resistance is located at 1.2615 (27/03/2017 high). Hourly support is given at 1.2324 (03/17/2017 low). Expected to show continued strength towards resistance at 1.2771 (05/10/2016 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY‘s bearish pressures are fadingHourly resistance can be located at 113.57 (16/03/2017 high) while support is given at 110.11 (27/03/2017 low). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF is surging. Hourly support is given at 0.9814 (27/03/2017 low). Key resistance can be found at a distance at 1.0344 (15/12/2016 high). Expected to show continued weakness. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.