13.03.201909:42 Forex Analysis & Reviews: Rising tensions increase demand for defensive assets

In the past weeks, there is a wave of optimism that dominated the markets amid the expectations of an early conclusion of a large-scale trade deal between the US and China. However, this wave is gradually eroding.

According to US Trade Representative, Robert Lighthizer, who spoke on the Senate Finance Committee, said that he hoped that negotiations would be completed soon but could not guarantee the signing of the agreement. It is known that the scheduled meeting with Trump at the end of March disappeared from the schedule of Chairman C, which may indicate that there are serious differences. The unnamed insiders report that China put forward the condition of legal guarantees under the agreements, which for some reason did not suit the United States and as usual expected that only the second party should undertake the obligations.

The NFIB Small Business Optimism Index improved slightly and increased by 0.5 points to 101.7 in February, but the trend is still negative.

In February, inflation decreased from 1.6% to 1.5% y/y, which indicates a weak correlation with optimistic forecasts for wage growth rates. The growth of core inflation slowed to 0.1% against an increase of 0.2% a month earlier, while the annual rate also declined from 2.2% to 2.1%.

Nervousness in the markets is reflected in the rising demand for gold. April futures broke through 1,300 and returned to March highs. OPEC countries are discussing the possibility of extending the deal to restrict production until the end of the year. The main reason is the lack of growth in demand amid events in Iran and Venezuela, which may indicate a global slowdown. The dollar does not look strong, as evident by the inability to strengthen against the euro even against the backdrop of the announced TLTRO plan.

EUR / USD pair

The bond yields of the eurozone countries continue to decline, playing back the results of changes in the monetary policy of the ECB. Markets fear that the intended measures may be ineffective and the ECB will be trapped in liquidity, losing effective measures to manage monetary policy.

The growth of EURUSD is completed, the chances of overcoming resistance 1.1300 / 10 a little, more reason to decline to 1.1230 / 40.

GBP / USD pair

The package of macroeconomic data published on Tuesday showed no uniform dynamics. On the one hand, the rate of decline in industrial production declined in January. While waiting for -1.3%, the real decrease was the same as a month earlier at the level of -0.9%. Data on GDP growth rates for 3 months to January inclusively turned out to be noticeably better than expected with + 0.5% against the forecast of 0.2%.

At the same time, NIESR has a negative outlook on economic growth. According to its data, the growth was only 0.1% in February while only 0.2% is predicted for the next month.

In January, the trade balance turned out to be noticeably worse than expectations, which worsens the record lows on the current account amid the flight of investors from London. Today, the Ministry of Finance will present its economic forecast for the next year, we should expect a deterioration in the budget forecast due to a fall in revenues, which will lead to even greater pressure on the pound.

The positions of the pound are fully determined by the three-day marathon in the British Parliament under the terms of the country's exit from the EU. Yesterday, the May government suffered another crushing defeat. The project was rejected by a margin of 149 votes and now parliamentarians will have to decide whether they are ready to support Brexit without an agreement at all. The probability of a positive outcome of the vote is also small and apparently, the next final result of this soap opera will be the third final vote, which will postpone the decision for another couple of months. Since the results of the elections to the European Parliament will already be known most likely in the middle of May, the UK will have to decide on its future before this date.

The pound will be under pressure in the short term due to increased uncertainty and the likelihood of a vote of no confidence in the government. The likelihood of a Tuesday low to 1.2960 is low and the support at 1.3050 will stand as markets do not expect surprises from today's vote. Growth is limited at the level of 1.3140/50.