The day after Brexit, US GDP in focus

The GBPUSD shortly spiked down to 1.2376, as the UK officially triggered the Brexit on Wednesday. The UK’s tone was moderate and conciliator, yet the kneejerk backlash from the European Union has been sharp. The EU pushed back the Britain’s proposal to discuss a free-trade environment, citing that the issue will be looked after at an advanced stage of the negotiations.

In the early stages, the major focus will be on the divorce itself and there is significantly diverging interests on the table. For the sake of prudence, the EU cannot facilitate the Brexit and take the risk of encouraging other members to replicate the British example.

The GBPUSD stabilized in the tight range of 1.2419/1.2451 in the early trading, slightly above its 50-day moving average. As the critical psychological quake is behind, the positive bias in the pound has still potential for a third attempt toward the 200-day moving average, 1.2585. Support is eyed at 1.2415 (100-day moving average) and 1.2360 (50% retracement on two-week rally).

The EURGBP rallied to 0.8735 on the back of the Brexit-shake, yet retraced back to 0.8662/0.8623 in Asia.

The FTSE 100 traded above its 200-day moving average (7370p), as the pound gave up some strength into the open.

Energy stocks (+0.10%) diverge positively as the WTI gained momentum to $50 per barrel.

Brexit shock priced in, GBP recovery in horizon

Moving forward, the mid-term bias in the pound remains positive, given that the scenario of a hard Brexit has already been priced in and out by the markets.

From a monetary policy perspective, based on rising inflationary pressures, low unemployment and decent growth, the Bank of England (BoE) could, in theory, raise the interest rates. Yet, the BoE is expected to remain on hold to walk the UK through an eventually bumpy Brexit journey. Given the solid macro metrics, the only fact of maintaining the status quo is sufficiently dovish in our view. Therefore, the BoE expectations have a growing hawkish potential, which also gives a positive spin to the British pound across the global markets.

On the other hand, concrete steps in the EU negotiations should help the markets readjust themselves accordingly and gradually as the news flow in.

This being said, downside risks prevail as the UK-EU negotiations could erupt into flames. Compulsive headwinds are the main risk to the pound’s recovery.

US GDP data could boost the Fed hawks following Rosengren’s comments

Except the yen, all G10 majors softened against the US dollar following hawkish comments from the Federal Reserve (Fed) presidents.

Boston Fed President Eric Rosengren said he would opt for three additional rate hikes in 2017 to prevent an overheating in the economy, as Chicago Fed President Charles Evans assumed two additional rate hikes would be ‘safe’, three hikes could happen.

The comments couldn’t prevent the US 10-year yields from slipping below the 2.40% level. The US 2-10 year spread flattened the most since the US election, as the short-end of the curve was lifted at a higher speed than the long-end. This is because the rates were being pulled higher from very low levels and companies are not concerned by extra hiking for the moment. For the moment, the ‘Trumpflation’ easily counterweight the rising rate pressures on the US companies.

The flattening yield curve suggests a slowdown in the US dollar rally in 2017, and eventually a downside correction.

In the short-run however, the positive momentum in the US dollar could further develop on the back of the economic data. The US will release the 4Q final GDP data at 1.30pm GMT. Analysts revised their expectations slightly higher to 2.0% from 1.9% q/q annualized. Any positive surprise should revive the Fed hawks and boost the short-term US dollar purchases.

In the stock markets, investors show reluctance to jump back on the reflation rally. The US stocks recover the recent sell-off at a reduced speed.

The Dow Jones is called 12 points higher at $20’671 at the open. Resistance is eyed at $20’730/20’760 weekly resistance.

EURUSD tests 1.0740

The EURUSD tested 1.0748 (major 38.2% retracement on March rise) on two consecutive trading sessions. Breaking the 1.0740 weekly support, the downside move could pick up extra momentum and extend to 1.0700 (50% retracement). There are mixed option expiries at this level. The 50-day moving average stands at 1.0670.

Gold stagnant but supported

Gold remained supported above the $1247 for three consecutive sessions. The flattening US yield curve could be supportive of long-term investors. In fact, the long-end of the US yield curve stabilizes despite wobbling speculations about how many rate hikes should undertake in 2017, meaning that the long-term investors’ sensitivity to the Fed policies remain fairly balanced at the moment.

The bullish development started in March should see support at $1245 (minor 23.6% retracement on March rise) and the critical $1235 (major 38.2% retracement) to encourage a renewed attempt to the 200-day moving average, $1260.

The $1235 should distinguish between a recovery in the bullish consolidation zone and a mid-term bearish reversal toward the $1200 mark.