USD erases losses as FX market moves sideways
Bulls made their great return on Monday on the back of disappointing wage growth on Friday that should ensure the Fed would act less aggressively than anticipated. The Dow Jones Industrial Average rose 1.31% to 24,776 points, while S&P500 added 0.88%. On Tuesday, Asian equities followed in the footstep of Wall Street with the Nikkei rising 0.66%, the CSI 300 adding 0.24%.
After reaching a 4-week low in late European session yesterday, the dollar index stabilised around 94.10 and has been trading sideways since then, as investors remain nervous about the China-US trade war. For the last two months, the market has been trading range-bound as investors already completed their reallocation towards less risky assets. Uncertainty is just too high right now; therefore, the “wait-and-see” approach will prevail as investors focus on short-term opportunities. Given the fact the fact that the dollar is currently sitting at the bottom of its 2-month range against most of its peers, the greenback should make a comeback.
EUR/USD fell 0.18% to 1.1730 amid renewed USD strength. The single currency ended last week off the wheel after a mixed job report. We expect further euro weakness in the short-term – mostly due to an overall dollar strength – with the 1.1681 as our first target, then the following support stands at 1.1640.
Two big figures leave May’s ship
May’s cabinet is changing its course. After the departure of David Davis, former Brexit Minister, it is the turn of Boris Johnson, Foreign Secretary to step down later in the afternoon. As both Brexiteers were the largest advocate of a hard Brexit implementation, it appears that May’s government will be gaining further flexibility in the implementation of a softer Brexit.
Despite the view of UK government instability translated on the FX market since yesterday’s event, it appears that the reasoning might be excessive. Indeed, since his withdrawal from Brexit Secretary, David Davis made no mention of any intention to overthrow of the Conservative party. Furthermore, since supporters of a hard Brexit remain a minority in the parliament, moderates remain in majority, both in Conservative and Labour parties.
The fate of Brexit negotiations is now in the hands of EU leaders and specifically European Council President Donald Tusk. May’s Brexit white paper due on Thursday will be decisive, as a “cherry picking” behavior would certainly turn the dialogue into a much tougher tone from EU side.
Yesterday GBP/USD bearish trading session remains excessive. Closing at 1.3260 (-0.17%), we would suggest that a strong rebound is expected in the short-term. Currently trading along 1.3270, the pair is expected to reach 1.3350 highs.
