Caution is written across the European markets and US futures today, traders are also tracking losses from Asia and the Chinese economic data has not helped the situation. The Chinese industrial number made it clear that the Chinese economy is facing a sluggish growth. The Industrial production data has been hit hard and it has slowed to 5.4%, missing all estimates. However, the US and European markets are on track to record the weekly gains. Thanks to the Japanese manufacturing number which confirmed that things are not all negative. The Tankan manufacturing index came ahead of the forecast and printed the number of 19, while the forecast was for 18.
As for the ECB, the president of the ECB decided that it’s about time to call a day in relation to the easing monetary policy and the bank will formally end the QE program at the end of this month. However, the bank confirmed that it is keeping a close eye on the economic pulse of the eurozone and it is aware of the faintness in the economic numbers. To balance the earlier hawkish message; Draghi sent a dovish signal by saying that the bank is not ready to go in the snooze mode fully, the intentions of reinvesting the cash from maturing bonds would continue until the market doesn’t need this medicine.
The euro lost it’s bullish mojo as the upcoming period of the interest rate hike which is no longer the most bullish scenario for the currency traders, as this period would see the reinvestment of cash from the maturing bond. Given that the price has failed to break above the 1.14 against the dollar, this sends a bearish signal. This month is supposed to be “the bull month” because the QE program ends at the end of this month but for now, the hopes for any major upside for the euro-dollar pair are limited.
Back in the UK, the EU has decided to play a hardball with May. The UK’s prime minister; Theresa May’s plea was thrashed by the EU. The EU isn’t ready to renegotiate the deal, she doesn’t have anything to sell back to the Parliament for the time being. We are sleepwalking towards a chaotic no-deal divorce. It appears both sides are willing to accept the worst outcome rather than have any happy ending. Well, divorcees never have a happy ending and this particular one is the ugliest of all. Having said this, under these scenarios, it is about managing expectations and Theresa May did this before she left for her trip to Brussels. It was clear for traders that her efforts may not bring any fruit straight away but she is determined to do whatever it takes to deliver a hard Brexit.
The sterling-dollar pair is flirting with the support level of 1.26 and it is likely that it will break this area unless Theresa May secures a variant of the current deal which is backed by the Parliament. It doesn’t appear to me that anything meaningful is going to happen this year so perhaps the best we could see for sterling is to consolidate around the current price level. Any resilience to bad news would support the fact that the odds are stacked in favour of higher move if May can secure a deal before the deadline.
