Sterling was unsettled during last week’s trading session with prices violently swinging between losses and gains after reports of Brussels bolstering the Brexit bill to up to $100 billion, which reinforced speculations of the EU playing hardball. Official negotiations of the UK leaving the European Union have yet to begin, but financial heavyweights have already started their battle of words on the Brexit topic.
With Theresa May vowing that she will be a “bloody difficult woman” in Brexit talks adding to anxiety, a rocky road filled with obstacles may lie ahead. Sterling could find itself exposed to downside shocks amid the uncertainty, with recent reports of the European Union warning that May could be barred from the negotiations terms, fueling hard Brexit fears.
Focusing on the macro fundamentals, UK construction PMI accelerated in April to 53.1, but this did little to inspire Sterling bulls with prices eventually descending back towards 1.2900. The growing uncertainty around Brexit negotiations, coupled with political instability ahead of the UK general election could create a scenario where markets slightly overlook fundamentals with much of the focus directed towards ongoing Brexit developments.
From a technical standpoint, the GBP/USD could come under renewed selling pressure if bears are able to break below 1.2875. A breakdown below 1.2875 may encourage a further decline towards 1.2775. In an alternative scenario, an intraday breakout above 1.2940 could pave the way to 1.3000.
Fed meeting and ADP in focus
The main event that could rattle financial markets is the Federal Reserve meeting which is widely expected to conclude with interest rates left unchanged. With economic data from the US mostly mixed since the previous Fed meeting and first quarter growth in 2017 cooling at 0.7 per cent, investors may heavily scrutinize the statement to see if there is a change in rhetoric.
The Dollar could be at risk of depreciating further if “doves” exploit the softening economic outlook to make a guest appearance today.
On the other hand, if the Federal Reserve maintains its hawkish bias and offers clarity on US rate hike timing, Dollar bulls could be given enough confidence to challenge 99.50.
Some attention may also be directed towards the pending ADP Nonfarm data, which could be treated with some skepticism after it reported a mammoth gain in March jobs, while NFP tumbled well below expectations under 100,000.
Euro searches for direction
The Euro has been on cruise control this week with investors observing the currency from a distance ahead of the second round of the French Presidential election voting on 7 May. With the current polls showing that Emmanuel Macron is holding a solid 20 point lead over Marine Le Pen, markets may have already priced in a Macron victory.
Although the Macron outcome has the ability to elevate the Euro higher, an unexpected Marine Le Pen victory could still rattle the financial markets with parity on the EURUSD becoming a possibility. From a technical standpoint, a failure for bulls to secure control above 1.0900 may open a path towards 1.0800.
WTI Crude dips below $48
WTI Crude was exposed to heavy losses this week as anxiety over the rising output in Libya and Canada, coupled with concerns of a dip in compliance with OPEC’s production cuts enticed sellers to attack. It is becoming increasingly clear that oil prices remain gripped by the oversupply fears with confidence rapidly diminishing over OPEC’s ability to stabilize the saturated oil markets.
Although some still remain cautiously optimistic that an extension of the production cut deal may limit the global glut, the incessant pumping of US Shale has left most investors skeptical, questioning whether prices will ever balance out. Much attention may be directed towards the pending crude oil inventory report which may pressure oil markets further if there is a build in US crude inventories. From a technical standpoint, WTI Crude is heavily bearish on the daily charts and a breakdown below $47.50 could open a path towards $44.00.
Written by Lukman Otunuga, Research Analyst at FXTM