Will the Brexit mess push GBP/USD down to and below 1.2000?
This week's weekly market outlook will provide insights for DAX30 CFD, the US Dollar, the Euro, the British Pound and Gold. We'll review the impact of the current Brexit mess, and the impact it could have on the GBP/USD pair.
Source: Economic Events Calendar 19 November - 23 November 2018 - Admiral Markets' Forex Calendar
DAX30 CFD
The DAX30 CFD started last week with a "bearish bang", losing as much as 2.2% on Monday. The main drivers for the bearish action could be found in a bigger loss in the shares of SAP after announcing its second biggest acquisition in history, fears around and escalation between Brussels and Rome around the Italian budget for 2019, and, again, Brexit negotiations.
Interestingly enough, it took the bears until Thursday to push the DAX30 CFD out of its Monday candle, which was a classic outside bar, even though the break lower wasn't sustainable.
If we take it from there, from a technical perspective the picture for the upcoming week of trading looks as follows: every break below the pre-weekly low around 11,220 points or above the pre-weekly high around 11,600 points is likely followed by further momentum into the respective direction.
A break lower activates the current yearly lows around 11,050 points and is the option with a higher probability. This is especially true if the mess around the Brexit deal (more details below in the paragraph on the GBP) escalates and forces May to resign as UK Prime minister.
On the other hand: beside the aspect that a relaxation around the Brexit deal could result in a push above 11,600 points, most likely followed by a follow through towards 11,700, Thanksgiving in the US could (and most likely will) result in reduced volatility in the days ahead due to trading volumes thinning out.
Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 17 November 2018, 9:00 AM CEST
Check out Admiral Markets' most competitive conditions on the DAX30 CFD and start trading on the DAX30 CFD with a low 0.8 point spread offering during the main Xetra trading hours.
US Dollar
During the first half of the trading week, the US Dollar Index Future was capable of stabilising around its current yearly highs, mainly driven by Euro and Pound Sterling weakness, not necessarily due to USD strength.
Into the weekly close, serious scepticism arose around our positive outlook for the greenback into the yearly close, as mentioned in our weekly market outlook last Monday.
Even though last week's outlook was positive, it seems as if US inflation data from last Wednesday can't justify it. While the annual inflation rate in the US increased to 2.5% in October from 2.3% in September, core inflation fell to 2.1% and to the lowest level since April 2018.
So, it seems as though even after the US economy took on some serious momentum as the latest data releases indicated, and after a massive FED stimulus plus tariffs from the Trump administration, inflation still did not really take off.
If now, after the big drop in oil prices, the ISM will be pressured with slowing activity throughout the oil sector. It therefore seems to be a logical consequence to expect the FED to become more dovish rather sooner than later, resulting in a sharper drop in the US Dollar.
On top of that, the comments from FED vice chairman Clarida on Friday, where he said that the FED needs to be especially data dependent, sounded quite dovish.
While the outlook for the USD can still be seen bullish as long as we trade above 93.00/30 points in the USD Index Future on a daily basis, a drop below 96.00 points could suggest a first sign of weakness ahead, probably especially against the Euro and GBP if the situation around a Brexit deals does not escalate any further and a deal is rather sooner than later and finally reached (with or without Theresa May…).
USD weakness and bearish momentum can still be brought on its way due to a unwinding of long positions by large speculators, which still keep their highest net long exposure in the Commitment of Traders Report in around 18 months.
Source: Saturday 17 November 2018 9am CEST - U.S Dollar Index - Weekly Nearest OHLC Chart: Barchart
Don't forget to register for the webinar "Admiral Markets' Weekly Market Outlook" with Jens Klatt, every Friday at 12pm London time. It's your opportunity to follow Jens as he explores the weekly market outlook in detail, so don't miss out!
Euro
Last week's market outlook we wrote:
[…] another attack at the current yearly lows around 1.1300 seems likely and possible in the next days.[…]
And right on Monday, the EUR/USD not only attacked but broke below 1.1300, marking new yearly lows. The main drivers were the ongoing conflict between Brussels and Italy around the Italian budget, which saw a rejection of the European Commission demands, and the Italian government sticking to its big-spending budget plan.
In addition to that, the mess around the Brexit negotiations pushed the Euro lower (note: the high positive correlation between the Euro and GBP results out of the fact that the UK is the fourth biggest trading partner of Germany (biggest economy of the EU) after the US, France and China).
The only positive aspect for the Euro in the upcoming days results out of the fact that, as written in the paragraph around the USD above, the US Dollar probably loses some of its steam and EUR/USD won't push straight lower.
Even if the Euro could finish the week above 1.1400 USD it has to be said that as long as EUR/USD trades below 1.1500, the outlook is clearly bearish on a daily time-frame and test of the region around 1.1200 seems very likely with a drop below that level activating a first target around 1.1150 USD.
Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 17 November 2018, 9:00 AM CEST
GBP
Last Wednesday, the world seemed to be still in order for Pound Sterling. As we pointed out in our market analysis for the day, it seemed as if the GBP had a serious chance to see a rally after EU and UK negotiators agreed on a text on how to avoid a hard border in Ireland, which potentially smooths the path to a Brexit deal.
It was clear that UK prime minister May would face some headwinds in the UK parliament, but no one saw the following coming: May was hit by several resignations during the parliament debated on the Brexit deal, seeing her cabinet falling apart.
The resignation letter of Dominic Raab (the second Brexit secretary to quit May's government in the past six months) in particular pointed out the significant problems the negotiated deal comprised: he said that that he couldn't support the deal for two reasons: 1) the treatment of Northern Ireland would be a "very real" threat to the integrity of the UK, and 2) the indefinite backstop would effectively grant the EU veto power over when the UK could leave.
The result was a sell off in GBP/USD, falling as low as 1.2725 USD, completely giving back all its November gains.
In the upcoming days, further losses in GBP on a broad scale seem likely, especially now with May facing a "no confidence" vote and further political uncertainty to come.
This is especially true, since EU Council Head Donald Tusk confirmed that EU Brexit summit next Sunday, the 25th of November - with or without a deal in the UK.
With implied overnight volatility in GBP/USD hitting 23% already on Wednesday and the highest levels since June 2017 around the general election, a push towards and break below 1.2600 seems possible.
In fact, it also seems an option that GBP/USD goes for another test of the region around 1.2000, the 2017 yearly lows:
Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 17 November 2018, 9:00 AM CEST
Gold
Even though Gold gave back most of its gains after the significant push higher on October 11 and pushing below 1,200 USD/ounce for the first time in more than a month, the picture into the yearly end still looks promising.
This is true, as long as the yellow metal trades above 1,180 USD/ounce while a push above 1,244 USD is still necessary to confirm the bottom forming against 1,160 USD/ounce.
A potential driver higher for Gold could be found if a drop in 10-US-year yields below 3% materialises, not only and potentially pushing the USD lower, but also pushing Gold higher.
After the comments from FED Vice chairman Clarida on Friday, the outlook for Gold is short-term bullish, but one should remember that with the economic docket being thin in the upcoming days and Thanksgiving ahead, it wouldn't come with a big surprise if Gold sees a calmer week of trading, stabilising below 1,244 USD and waiting for an attack of the current quarterly highs until the last week of November.
Source: Admiral Markets MT5 with MT5SE Add-on, Accessed: 17 November 2018, 9:00 AM CEST
The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:
- The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation.
- Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
- Each of the Analysis is prepared by an independent analyst (hereinafter "Author") based on the Author's personal estimations.
- To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
- Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
- The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
- Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
- The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.
- Leveraged products (including contracts for difference) are speculative in nature and may result in losses or profit. Before you start trading, you should make sure that you understand all the risks.
