Trade optimism as US -Sino trade talks continue and hopes that a second US government shutdown will be avoided, have boosted sentiment across the globe on Tuesday. Yet despite an initial move higher and a positive start on Wall Street, the FTSE was unable to cling onto its morning gains. A rebounding pound, after Theresa May pleaded for more time for her Brexit negotiations, along with TUI dragged the UK index lower.
Pound jumps as PM May pleads for more time
The pound bounced off a three-week low after Theresa May said she needed more time to renegotiate with Brussels over her Irish backstop arrangement. Whilst Theresa May still claimed that the government was aiming at leaving the EU on 29th March, she dodged questions on extending Article 50. The pound picked itself up from $1.2833 and is heading back towards $1.29.
At these levels it is still safe to say that the markets are not pricing in a no deal Brexit. Pound traders are seeing an extension of Article 50 as the most likely scenario. This would see a continuation of uncertainty keeping pressure on the pound, but not pulling it as low as a no deal scenario would. Should traders start to believe that Theresa May’s deal is going to make it through Parliament as she runs the clock down, then we could expect the pound jump sharply through $1.30 back towards $1.34. However, with another meaningful vote now expected on 27th February, there is still some time to go.
A stronger pound is less beneficial for the multinational companies on the FTSE. These make up around 70% of the index. As a result, the FTSE could barely keep its head above water, whilst the Dax soared 1% and the Dow surged 0.8% as it opened.
Dollar runs out of steam
The dollar experienced a bout of profit taking after 8 straight days of gains. With no notable data to support the next leg higher, dollar traders booked their profits whilst waiting for the next catalyst. Fed Chair Powell is due to speak this evening at 17:45 GMT. If he sticks to his recent song sheet, then he is unlikely to do any favours for the dollar. US inflation data tomorrow could also keep dollar bears out of the game. CPI is expected to fall to 1.5% from 1.9% in January. Falling inflation will keep the Fed firmly in a wait and see mood.
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