Pound slumps dollar jumps and stocks off lows

It has been a hectic start to the new trading week. Brexit-related headlines and the pound garnered most of the attention, although we have also seen some sharp moves in the likes of the USD/JPY and equity indices.

As my colleague Matt Weller pointed out HERE , the pound fell further after earlier reports were confirmed that the UK Prime Minister Theresa May would cancel Tuesday’s parliamentary Brexit vote and return to Brussels to renegotiate the controversial Irish border backstop arrangement. Mrs May’s decision was not surprising at all; it just means more delays and more frustration for everyone involved. The markets don’t typically respond well to uncertainty and today was no different with both the pound and to a lesser degree the FTSE taking a tumble.

As the cable slumped, the Dollar Index rose. In fact, the greenback has had a good day so far, making good its entire losses from Friday when it fell on the back of a disappointing US jobs report which showed employment only grew by 155,000 last month and wages rose 0.2% compared to 0.3% expected. The EUR/USD and gold fell back while the USD/JPY rallied.

Meanwhile, crude oil prices gave up their post OPEC+ gains as investors were unimpressed with the cuts of ‘only’ 1.2 million barrels per day in oil supply. The pullback in crude oil weighed heavily on the Canadian dollar, which helped to lift the USD/CAD back above the 1.34 handle again. The USD/CAD has therefore made back its entire sharp losses from Friday when news of a strong Canadian employment report and a not-so-strong US jobs report weighed heavily on the pair.

Elsewhere, stock indices tumbled at the open but were noticeably off their lows at the time of writing, although still unable to break the series of lower lows and lower highs. Growth and valuation concerns continue to weigh on stocks. But will central banks come to the rescue again?

Investors are looking forward to the upcoming policy decisions from the European Central Bank on Thursday and the Federal Reserve next week. The ECB is set to end its QE programme this month, but President Mario Draghi may sound a bit more dovish at his press conference in light of ongoing Brexit uncertainty and given the big slump in oil prices weighing on inflation expectations, not to mention the recent emerging market currency crisis hitting demand.

Meanwhile the Fed will likely point to ongoing strength in US economy to justify another rate hike this year, but it will probably not commit to any hikes in 2019 as it will once again make clear that future rate hikes will be data-dependant.

We think that the Fed’s potential dovish outlook will cause the dollar to fall but may provide support for equities – especially if the ECB also turns out to be more dovish than expected.