GBP still overvalued considering coming events

European elections results published on Sunday are most likely to cause torments on the marketplace while market holidays in the US and the UK on Monday should have an impact on liquidity. The recent bounce in GBP/USD from 1.2657 low is above all a technical correction since the outlook for British pound remains gloomy. The results from EU elections, PM May’s resignation announcement and dragging trade discords between China and the US stay major concerns.

Theresa May plan to submit a fourth vote on its Withdrawal Agreement to UK MPs is fading as investors are anticipating her departure in 7 June 2019, opening the door to supporters of a harder Brexit deal. Boris Johnson who initiated the Brexit campaign in 2016, is perceived as favorite in the 6-weeks run that should start following US President Donald Trump visit in the UK in early June 2019. Furthermore, with the support of British voters to Nigel Farage newly formed Brexit Party, the turmoil has probably just begun. Considering upcoming events, we consider the recent up-move in GBP/USD as unjustified and continue to favor further downside risk. The recent releases of April retail sales of 0% (prior: 1.10%) and ex. auto fuel 4.90% (prior: 6.20%) is not particularly bright either.

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Currently trading at 1.2689 (-0.51 year-to-date), GBP/USD is heading along major support at 1.2607 (02/01/2019 low).

Financial markets stabilise after a bloody Thursday

World equities recovered slowly on Friday morning amid hopes that Donald Trump and Xi Jinping find common ground on and move forward with trade negotiations. By forcing Google to restrict Huawei’s access to Android and by putting them on an export blacklist list, the decision rattled financial markets as fears spread. European equities bore the brunt of the sell-off yesterday as investors anticipated that the US President could use similar methods in the EU-US trade negotiations. The DAX erased 1.75%, the EuroSTOXX 600 slid 1.40% while the S&P 500 gave up only 1.20%. In the FX market, the reaction was similar with investors buying safe-haven currencies such as the Swissy and the Japanese yen. USD/CHF tumbled to 1.0024 while USD/JPY reached 109.46.

This morning the confidence has returned partially as Trump said that Huawei could be in included as part of a trade deal. Global equites trimmed substantially yesterday losses with the DAX jumping 1% and the EuroSTOXX 600 rising 0.80%. US futures are also better bid with front month contracts climbing 0.60%. In the FX market, the story is much different, as risk aversion remained quite high. Investors are reluctant to load on risky asset. After dipping to a two-year low, the single currency bounced back toward the 1.12 threshold. The pound sterling has been on a roller-coaster ride over the last few day amid Brexit uncertainties. GBP/USD slid as low as 1.2606 before returning above the 1.27 level. Overall, we are not convinced that the global situation would change much in the short-term as US/China trade war is in full swing. Cautions is still warranted, especially for directional trading; however, given the market turmoil, volatility trades are quite appealing.

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