European markets are rising marginally on Tuesday after a sell-off at the start of the week as investor focus is attuned to the crucial vote on Prime Minister Theresa May’s Brexit deal. The recovery potential is limited due to a cautious tone ahead of the vote and after the data showed that German economy grew at its weakest rate in five years in 2018. In particular, the GDP increased 1.5% compared to 2.2% in 2017. And considering the risk of a so-called disorderly Brexit, weakening outlook for German economy makes investors feel uncomfortable. So far, German DAX 30 adds just 0.01% to 10,857, Italy’s FTSE MIB declines by 0.27 per cent to 19,119, Britain’s FTSE 100 appreciates by 0.28 per cent to 6,874, while France’s CAC 40 adds 0.14 per cent to 4,769. US stock index futures point to a mild rebound as China slowdown fears have ebbed for the time being.
The dollar turned positive on the day against major rivals after the initial selling. Sterling overnight implied volatility hit a 18-month high ahead of Brexit deal vote, which confirms that traders expect some big movements in the cable later today. It looks like a calm before the storm as GBPUSD is trading within a limited range. After a brief jump above 1.29, the pound attracted some profit-taking that took the pair to daily lows around 1.28. Should the parliament reject May’s deal, the UK currency could dive below 1.27 and go even lower, depending on the developments around the divorce process.
EURUSD turned red in tandem with the pound. The prices failed to challenge the 1.15 barrier once again and had to retreat to the 1.1423 region. The weak economic data from Germany added to the selling pressure on the single currency as traders react to similar signals from the region more and more painfully. In a wider picture however, the euro remains in a consolidation phase amid lack of the macro drivers. The US retail sales report is delayed due to the continuing US government shutdown, so traders focus on the general sentiment in the global financial markets as well as on Brexit developments. The downside risks for EURUSD could increase if the pair fails to get back above 1.15 any time soon.
Brent crude is making shallow recovery attempts and still fails to attract enough buyers to return above the key $60 mark. Saudi Arabia tries to support the market by positive comments on the OPEC+ deal and the global economy, but this is not enough to give a substantial lift to prices. Brent is now stuck within a channel capped by the above mentioned psychological level, and the longer the barrel remains below this area, the higher the risk of another bearish correction. Later today, the market will focus on risk sentiment in the context of Brexit deal vote, as well as on fresh API data.
Gold prices failed to test the psychologically important $1.300 level yesterday and turned red on Tuesday. However, the selling pressure is limited as investors remain vigilant ahead of the vote in the UK that could spark a fresh sell-off in risky assets and send the precious metal higher. Despite the upside risks, the prices will hardly be able to make a clear break of the mentioned level as it is strong enough. Technically, gold needs to stay above $1.280 in order not to waste its upside potential in the days to come.
Nathan Lambert, Head of Global FX Analytical Department