Hard Brexit fears inspire Sterling bears

Sterling/Dollar stumbled to fresh 31 year lows at 1.2736 during trading on Tuesday as the horrible combination of Brexit anxieties and a resurgent Dollar encouraged bears to install repeated rounds of selling.

It seems Theresa May’s sanguine attitude to leaving the European Union while focusing on immigration may have sparked concerns of a potential hard Brexit consequently leaving the Sterling vulnerable to steep losses. Although investors were provided some clarity when March 2017 was the date set to invoking the article 50, the uncertainty over how the Brexit negotiations will take place in the period after continues to haunt investor attraction towards the pound. It should be kept in mind that the persistent Brexit fears have always had a firm grip on the Sterling with explosive levels of volatility expected in the coming months as anxiety mounts ahead of the article 50 invoke date.

With the Dollar strengthening amid renewed US rate hike expectations, the GBPUSD could trade lower as Sterling bears attack. From a technical standpoint, the GBPUSD is heavily bearish as prices are trading below the daily 20 SMA while the MACD has crossed to the downside. Previous support around 1.2800 could transform into a dynamic resistance which encourages a further decline lower towards 1.2700.

Stock markets edge higher

Financial markets could receive a welcome boost this week if the combination of easing Deutsche Bank concerns and rising oil prices bolster investor risk sentiment. Asian stocks have already commenced Tuesday on a firm footing following Yen’s weakness which propelled the Nikkei into gains. In Europe, Sterling’s vulnerability from the ongoing Brexit concerns turbo charged the FTSE100 +1.34% higher as of writing. Although Wall Street closed in losses on Monday following the firm US ISM manufacturing data that renewed expectations of a US interest rate increase this year, the bullish domino from Asia and Europe could elevate American stocks.

While the short term gains repeatedly displayed in global stocks have been somewhat impressive, it should be kept in mind that the ingredients for a bear market continue to linger in the background. The renewed Brexit anxieties have noticeably left investors on edge while the uncertainty over the looming presidential election weighs on risk sentiment. Stock markets have entered a phase of extreme sensitivity and it could take an unexpected catalyst to trigger a market-shaking selloff.

Dollar bulls on the offence

Dollar bulls were installed with inspiration on Monday following the firm ISM Manufacturing PMI of 51.5 which renewed optimism over the Federal Reserve raising US interest rates this year. If US domestic data continue to follow this positive pattern then the central bank could be provided a justifiable reason to raise US interest rates in December 2016. Investors may direct their attention towards Friday’s Non-Farm payroll report for additional clarity on the health of the US labour force in this period of global uncertainty. Dollar bulls are on the offense and this can be seen in the Dollar Index which has turned bullish on the daily timeframe. A decisive breakout and daily close above 96.00 could entice buyers to send prices higher towards 96.50.

WTI bulls challenge $49 

WTI Crude received a lifeline last week following the unexpected OPEC preliminary deal which instantly renewed optimism over a potential freeze deal agreement in November. While the gains displayed in oil were impressive, the upside may have been capped as the persistent oversupply concerns passively haunted investor attraction towards the commodity. Although OPEC has agreed that output may be cut by 700,000 barrels a day, this has not been officially confirmed with members still producing record output levels in the saturated market. The cartel may be commended on their ability to exploit oils sensitivity to create speculative boosts in prices but such may come at a heavy cost.

From a technical standpoint, although WTI is turning bullish on the daily timeframe buyers are struggling to take prices above the $49 resistance. A breakdown below $47.50 could open a path back lower towards $46.

Commodity spotlight – Gold

Gold stumbled to near two-week lows on Tuesday as the strengthening Dollar encouraged sellers to attack. Renewed expectations over the Fed raising US interest rates this year has pressured the zero-yielding metal further with prices currently hovering above the $1305 support. If Friday’s NFP exceeds expectations, then Gold could be destined for more punishment with prices potentially conquering $1305. From a technical standpoint, the yellow metal is bearish on the daily timeframe as prices are trading below the daily 20 SMA while the MACD has crossed to the downside. A breakdown below $1305 could open a path towards $1285.

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Otunuga is a research analyst at FXTM