Now Article 50 is out of the way, let inflation lead the markets

The big news on Thursday is not the fallout from that huge political millstone – the UK triggering Article 50 – but rather musings on the weaker than expected inflation data coming out of Spain and parts of Germany. This gives some credence to a rare non-Brexit headline yesterday that the ECB is wary of changing its message before June, which suggests that ECB QE is likely to last the course.

Could German political risk be more of a threat for the pound?

Reflation and the global economic recovery are likely to become the key themes over the summer months, as Brexit negotiations are likely to remain on hold until after European election season. Talking of which, the odds of a Frexit are receding, Oddschecker now expects a 24% chance of victory for Marine Le Pen in the French Presidential election in May. However, risks are now centring on Germany and the prospect of Merkel losing in September’s election and Social Democrat Martin Schulz winning. If this happens then it could de-rail the Brexit negotiations and make it harder for the UK to get a sweet deal.

German inflation data due at 1300 BST today is likely to be key for the FX market today. The market is expecting a reading of 1.8% for March, but if we see further disappointments from other German regions then the prospect of a weaker reading will start to rise. If German CPI does come in lower than expectations we would expect the euro to take a dip, as it would make a more “hawkish” ECB less likely. EURUSD has faded this week and is lower again on Thursday. Key support comes in at 1.0740 – the recent low, then 1.0677 – 50-day sma.

Overall, weaker CPI from Germany today could lead to a weaker flash reading of CPI from the Eurozone on Friday. This is significant, as the German – US yield spread has started to move lower once again after recovering earlier in the month, and it could head further south if we get a weak CPI reading on Friday. This makes a sustained euro recovery an unlikely event in the medium-term, and we could see further euro weakness in the coming days.

Tricky negotiating tactics in Brussels set to weigh on the pound

The pound is also at session lows this morning, and a break below 1.24 to the lows of 1.2377 from earlier this week is a possibility. Wednesday’s mixed reaction to the triggering of Article 50 was to be expected – markets move on news and there was no news. The news-flow is unlikely to be too GBP-friendly in the next few days. We expect the EU to release its draft Brexit negotiating document tomorrow, which could show us whether or not the UK and the EU are on the same page regarding starting trade negotiations at the same time as exit negotiations. This could be a major sticking point for the UK, and if the EU does not allow trade talks to go ahead straight away then this could be considered a negative for the pound and for companies listed on the FTSE.

A tricky negotiating environment for the UK combined with rate rises in the US suggests a weaker GBP/USD to me over the long-term. While we expect some stickiness around 1.2420 – a cluster of sma support, a significant break below here could lead to a return to the 1.20 level from earlier this year.

Why the FTSE 250 remains vulnerable

At the time of writing supermarket Morrison’s is leading the FTSE 100 after it was raised to a buy by BofAML; the FTSE’s real estate sector is still lagging, a sign that Brexit is starting to bite, and we could see underperformance in this sector for some time. Interestingly, the FTSE250, which is considered to be more sensitive to Brexit fears, is higher today, and remains close to record highs. However, it is trading higher in a tight range, which suggests that the market may not be convinced by this rally and if we get any negative headlines out of Brussels in the next two days then we could see this index start to falter.