UK pound under pressure in lead up to Brexit talks
Attention of the market is turned to political tensions in the UK and the FOMC meeting that starts tomorrow. After a confident victory of Emmanuele Macron’s party at parliamentary elections in France, the main focus of European investors again shifted to Great Britain where investors are trying to determine the possibility of the new coalition that will include Tories and Democratic Union Party, the biggest party in Northern Ireland. We do not exclude the change of Prime Minister in the UK after Theresa May’s decision to run new elections led to the loss of majority in the House of Commons. Lack of political stability in the country puts pressure on the pound, especially before the Brexit talks with the EU that will start on June 19.
The central event of the current week will become the Fed’s statement on monetary policy on Wednesday. It is highly anticipated that interest rates in the US will be raised by 25 bps to 1.00-1.25%. This scenario is mostly priced-in to the markets but the rhetoric of the Fed statement, concerning the timing of next monetary tightening steps may lead to a rise in volatility.
The appetite for risk is low before the rate hike decision, that leads to the rise of the yen that along with gold and the Swiss franc is known as a safe haven asset. Additional pressure on gold is provided by the rise of US yields which makes an investment in gold less attractive compared to the assets that provide interest income.
Price growth of American oil benchmark WTI is explained by the statements from a couple of OPEC members, including Qatar and Saudi Arabia, where it was confirmed the intention to keep the deal on oil production cuts, despite the geopolitical crisis in the Middle East.
The common currency quotes retreated after a slight increase at the beginning of the trading session. EUR/USD returned to the important 1.1200 mark and the lower limit of the local upward trend. Breaking through these lines may become a trigger for the further price decline to 1.1160, 1.1100 and 1.1020. In the nearest future, growth will be limited by the resistance lines at 1.1240 and 1.1280.
Bears are trying to pull the price of the pound further to the south amid uncertainty concerning the future of Theresa May as a Prime Minister of the UK. The Conservative party is continuing negotiations on forming the new coalition before the talks with the EU on the terms of Brexit. After breaking through 1.2700, the price is approaching the local minimum near 1.2630 and may continue its decline to 1.2600 and 1.2500. An upward correction may be triggered by profit-taking and in this case, the potential target will be 1.2700. An additional indicator that points to the possibility of price rebound is the RSI on the 15-minute chart that is near the oversold zone.
Increased demand for defensive assets, before the Fed’s statement on monetary policy on Wednesday, resulted in the fall of USD/JPY. We should mention that the sell-off in technical stocks in the US, threatens investors and may lead to a correction in the American stock market that traditionally switches investors’ attention towards defensive assets. Currently, the USD/JPY price is consolidating around 110.00. Closest targets in case of further decline will be 109.60 and 109.00. For the resumption of growth with potential objectives at 110.70 and 112.00, quotes need to overcome the resistance line at 110.30.
The rise in US Treasuries yields together with the anticipated increase in the Fed’s interest rates makes the bullion less attractive for investors. We should note that quotes of XAU/USD have just left the limits of the upward channel and are consolidating in the narrow range 1265-1270. In the case of continued consolidation within this corridor, the probability of price increase in either direction will rise. Dovish statements of the Fed’s chairwoman or further fall of stock markets may lead to a sharp increase in gold prices to 1280 and higher. The closest targets in case of continued decline will be 1260, 1256 and 1244.
The US oil benchmark – WTI has shown confident growth after representatives of Qatar and Saudi Arabia confirmed that their countries are willing to continue participation in the agreement on oil production cuts. Despite this, the price decline may resume after reaching the upper limit of the downward channel. In such a case, closest targets will be 46.00 and 45.20. On the other hand, overcoming the resistance at 47.00 may become an indicator of the trend change to positive with growth potential up to 47.75 and 48.35.