Market chatter tends to be on the possibility of a no deal and then all hell breaks loose, but what happens if we get a deal? Any positive news from the 18th October EU summit is likely to be seen as a possible breakthrough in talks, with another special summit to take place in November to tie up loose ends. Any deal will need parliament’s approval but how will the markets react?
Prior to the referendum, Sterling was trading around the 1.5 mark – could we see a reversal up to these heights when reaching a Brexit deal? Back in April we saw moves up to 1.43 but a combination of a strong Dollar and an impasse in Brexit negotiations have seen this trickle down to as low as 1.26. A reasonable target would be to see this back up in the 1.35 area as a start, this is the 50% and a major area of price action which has been dominant since June 2016. The next point of resistance comes in April and Jan 2018 at 1.43, which sits just below our multi-year 50% Fib at 1.45. We then enter a large zone of multiyear price action between 1.45 and 1.50, which saw big areas of support in 2013 and 2015 as well as holding the move higher during the Brexit vote.
There has been a strong correlation between Sterling and the UK 100, with both moving in opposite directions. FTSE 100 companies earn around two-thirds of their revenues overseas so with the Pound dropping it would boost their market cap in Sterling, driving the price of the FTSE north. FTSE has traded up from 6000 since the Brexit Referendum to highs of around 7,900. Bourses across the globe have enjoyed strong moves although a deal is likely to remove the threat of barriers a no deal brings. It is likely to bolster Sterling so we should see the UK 100 give back gains. Currently, we are being capped by the 50% fib from the May high to the September low. Moves below the monthly trend support could be a strong sign of weakness, possibly setting up a further move below 7200.
Gold prices have seen an 11% drop since April, in part to do with the rising dollar, but the volatility we are seeing has been slightly underwhelming. Gold volatility spikes on political distress, which we are likely to see over a no deal Brexit. But if we come to a deal, will Gold continue to depreciate? It’s likely we may see volatility either way but if political uncertainty begins to ease between the UK and EU, there may be a fight back on the Dollar in turn seeing gold prices rise.
EURUSD & European Indices
The Euro, similar to Sterling, has seen depreciation against the Dollar. The disparity in rate paths pursued by central markets has been fundamental driver in recent moves. With political uncertainty removed with a deal, expect the Euro to piggy back off the strength in Cable (although nowhere near as powerful!). Be careful on developments in Italy, which seem to be taking centre stage and weighing on the Euro. 38.2% fib have been doing a job here and holding resistance between 1.7769/.1857, above here leaves us open for moves to the 50% at 1.1925.
European bourses again to get a spring in their step and drive up against recent weakness if a deal is announced. Moves will very much be short lived in the European majors, the Germany 30 has been under pressure for some time and we are seeing attacks on support levels held since March 2017. Lower highs have been printed since May/June 2018 and this does suggest we are building up for moves lower. Moves below 11,867.3 will be a precursor for a potential strong drive south, below 11,681 would be very interesting!