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FTSE downbeat as pound swings higher

The UK’s Brexit continues to make headlines and the pound is subject to heavy swings. After having tanked to 1.2088 against the US dollar yesterday, the pound-dollar rebounded past 1.50% in today's session. News that the UK Prime Minister Theresa May accepted to let the Parliament vote on her Brexit terms, while demanding some freedom in negotiations, revived hopes that the country could opt for a softer, more market-friendly and socially acceptable Brexit. The pound recovered to 1.2325 against the US dollar, as the euro-pound broke below the 0.90 handle at the European open.

From a political point of view, the event risk in the UK remains high and the foreign exchange markets remain heavily biased on the short side of the pound market.

From a monetary policy perspective, the Bank of England’s (BoE) maneuver margin is rather tight. The market gives a meagre 12% probability for another rate cut before the end of 2016. Yet of course, the BoE remains alert and could opt for alternative policy tools, such as broader asset purchases to ease a potential short-term panic in the financial markets should Brexit turn into a more agitated chaos than previously anticipated.


The FTSE 100 is paring gains in London. Industrials are leading losses (-1.00%), while energy stocks (-0.60%) remain under decent selling pressure on the back of the rising worries that oil may fail to hold support at $50 per barrel.


The US dollar gives away a part of its recent gains against the G10 currencies before the release of the Federal Reserve (Fed) meeting minutes. The recent improvement in US yields suggests that the market is more optimistic regarding a potential Fed rate hike by the end of the year. As of today, the probability for a December rate hike is priced in at 67.6%.


As the US 10-year yields advance to 1.78%, the disinvestment in gold continues. The precious metal trades at $1255, approximately $20 lower than its 200-day moving average. Should the Fed set in motion another interest rate hike by the end of the year, gold may find it hard to take over the resistance building at $1275/$1300 area.