Flight to Safety as Geopolitics and Trade Rock the Market

Last week, the sterling was among the best-performing currencies. It rose as investors placed their hopes on a Brexit deal coming as early as today. Today, the sterling dropped sharply as these hopes disappeared. On Sunday, it was reported that the talks had reached a stalemate. This was despite of a surprise meeting between the UK Brexit minister, Dominic Raab and his EU counterpart, Michel Barnier. A report by Bloomberg said that officials had given up on a breakthrough this week and are concerned that time is running out for a deal to happen before March next year. The biggest barrier this week was the decision on the Irish border, which remains the thorniest issue in the negotiations.

The price of crude oil jumped after a conflict between the United States and Saudi Arabia emerged. This was after the disappearance of a Saudi journalist two weeks ago. In an interview, the US president said that he was considering punishing the country if it emerged that it was responsible for the murder. This is important news because of the important role that Saudi Arabia plays in the oil market. Every day, it pumps more than 12 million barrels of crude oil. This makes it the second biggest crude exporter after the United States. Saudi is also a large global investor with its sovereign wealth fund having more than $500 billion in assets.

World stocks declined sharply as global risks increased. In Asia, the Shanghai Composite Index declined by more than 1.5% extending a rout that has wiped more than $3 trillion in value. In the past 6 months, the index has fallen by more than 16%. In Hong Kong, the Hang Seng fell by 1.4%, continuing the slump that started early this year. At the same time, the Japan’s Nikkei fell by almost two percent. In the United States, the Dow and S&P pointed to a lower decline with the two expected to fall by 60 and 70 basis points respectively. As the risks increased, investors turned to the so-called safe havens with the Swiss Franc and gold rising by more than 60 and 115 basis points respectively.

XAU/USD

In the past few days, the XAU/USD pair has been trading within the narrow range of 1180 and 1210. On Friday, it moved above the resistance and today, it climbed to an intraday high of 1232. This happened as risks on trade and geopolitics continued. As the pair rose, the RSI moved above the overbought level of 70 while the momentum indicator moved above the 100 level. There is a likelihood that the pair will experienced a slight dip as bulls take profits. This dip will then see a continuation of the rally.

EUR/USD

After initially falling against the USD, the euro recovered and reached an intraday high of 1.1600. This was the highest level since last Friday. The pair is trading along the upper band of the Bollinger Bands, an indication that it could continue to move up. This is confirmed by the Average Directional Index (ADX), which is currently at almost 30. There is a possibility that the pair will continue moving up, potentially to the 1.1610 level.

GBP/USD

The GBP/USD pair dropped sharply to a low of 1.3082 after the talks between the EU and UK ended in a stalemate. During the European session, the pair managed to recover losses as the bulls won over the bears. It reached an intraday high of 1.3165. Traders believe that the EU and the UK will ultimately make a deal before the official March deadline. Today’s low was along the 61.8% Fibonacci Retracement. It is also heading to the middle line of the Bollinger Bands. There is a likelihood that the pair will be volatile this week as investors focus on Brexit talks and employment and inflation data from the UK.