Risk aversion lingers
Since the beginning of the week, financial markets have been stuck in limbo as trade war uncertainties linger. Asian equities closed in red as risk-off sentiment prevailed. The Nikkei closed flat, while Chinese equities continued to suffer with the CSI 300 falling 1.03%. Indonesian equities suffered the most in Asian EM complex as the JCI erased 1.67%. However, European equities have been rather hesitant in early trading session, which suggests we may be out of the wood; however, the lack of good news could most likely translate into further weakness. The VIX indexed eased to 17.09 from 17.91.
In the FX market, investors continued to favour less risky asset. After surging across the board yesterday, the greenback consolidated gains this morning with the Dollar Index stabilising around 95.40. The index is currently testing the key 95.50 resistance area (high from June 21st). Given the highly uncertain environment, a breakout cannot be ruled; however, the buck is in overbought territory against most of its peers, which suggests that a pullback is highly probable.
EUR/USD is testing the support that lies at 1.1510 (low from May 29th and June 21st), USD/CHF failed to break the 0.9990 resistance (high from June 18th), while kept on treading water between 109.20 and 110.90. In the absence of fresh news, the market will stay in wait-and-see mode.
Further weakness for the pound
As the European Union final summit regarding the migration crisis is taking place today, expectations of further advance in Brexit are set aside, despite recent request from EU and UK businesses to show measurable progress in the arrangement (i.e. Irish custom border).
Accordingly, industrials are becoming nervous, such is the case of Airbus’ recent statement warning of leaving the country if no deal would be found until 2019. Private company Heathrow Airport Holdings, went one step further, announcing its departure from Oxford headquarter to the Netherlands, in order to remain under EU law after Brexit.
Since Brexit negotiations are placed at a lower priority on Europe’s agenda, disappointment is felt on the pound side. Although Bank of England interest rate increase (2 August 2018 earliest) weighs on the balance, we would rather favor a bearish bias for the GBP/USD pair. Indeed, as one of the weakest currency on a quarterly basis, GBP/USD is currently trading at November 2017 range, valued at 1.3090 and heading along 1.3070 in the short term.
