Fears about the effect of Brexit eased over the last few weeks as UK Prime Minister Teresa May finally triggered the Article 50 on 29th March, kicking off the start of a two-year long process of leaving the EU. This will give markets plenty of time to digest and react to the negotiation process while shifting focus from “Brexit” itself to the fundamentals of the UK economy.
According to a survey conducted by the advisory firm Deloitte, nearly a third of chief financial officers said they are more optimistic about the prospects for their company than they were three months ago. However, 60 percent still believe the business environment will be worse when the UK leaves the EU, according to the survey of 130 CFOs from 91 FTSE 350 firms and other large private companies, a slight fall from 66 percent in the previous quarter.
Pessimism has been priced into the tumbling of sterling over the past three-quarters. GBP has tumbled over 16 percent against the US Dollar and nearly 10 percent down against the Euro since the EU referendum.
As a result, inflation has raised to 2.3 percent in February – the highest reading in over three years and unemployment rates continued to fall – to an 11-year low of 4.8 percent. A weaker currency is exerting positive effects on the economy as industries including exports, tourism and investment get a boost, forming a positive feedback loop into the country’s currency.
Furthermore, the certainty brought about by triggering Article 50 and the ongoing negotiation between the UK and the EU, will likely stabilise the currency market and probably result in a “short-squeeze” phenomenon in the pound.
Technically, the Pound is attempting to break higher. GBP/EUR is ranging between a ‘post-referendum’ triangle and we may see a breakout soon. The momentum indicator MACD is trending higher, showing a pickup in upward momentum. According to the Fibonacci extension, its near-term support and resistance level could be found at around 1.118 and 1.196 area.
Similarly, GBP/USD has been ranging between 1.200-1.270 area for six months. Should we see a breakout above the key resistance level of 1.270, the next resistance could be found at 1.285 and 1.315 respectively.
Xi-Trump summit in focus this week
China President Xi Jinping will meet US president Donald Trump at Trump’s Mar-a-Lago resort in Florida on 6 – 7 April this week, marking the first meeting between the leaders of the two nations. The meeting will have significant meaning for the bilateral relationship in the new era and will help to promote peace, stability and prosperity in the Asia-Pacific region, according to China’s top diplomat Yang Jiechi in a statement on Sunday.
Some key topics discussed which include trade, currencies and border tax, are some aspects that market is focused on and nervous about ahead of this summit. Trump’s protectionism and Xi’s strong diplomatic stance could rub out sparks and potentially surprise the market. However, the chance of that happening is small as China will ensure the summit between the two leaders is “a complete success”.
Currently, nearly half of US’s trade deficits come from China and if the new president act on his promises to reduce deficits and impose tariffs on imports, trade conflicts between the two countries under Trump’s administration would seem inevitable. Trump tweeted last week that the meeting would be “very difficult” due to trade issues with China.
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By Margaret Yang (CMC Markets) in Singapore
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