(07 MAY 2020)DAILY MARKET BRIEF 2:The pound is expected to remain under pressure

In the UK, the Bank of England (BoE) is widely expected to maintain the interest rates and the bond purchases program unchanged at today’s monetary policy meeting. But following the BoE’s rapid and sharp policy response to the coronavirus crisis, investors know that the bank is ready to further loosen its purse’s strings, if needed. Therefore, the market reaction to the BoE decision will likely remain subdued. If anything, the dovish BoE would give support to sterling improving prospects of recovery in Britain.
The pound is expected to remain under pressure as investors expect Johnson’s confirmation that the lockdown could be extended by another full month, however, Johnson’s eagerness to relax some measures starting from Monday to give a sigh of relief to Britain’s sputtering service-heavy economy could throw a floor under the pound sell-off. We will have more details on how Johnson will proceed with the winding down of the lockdown Sunday.
Cable finally broke the 50-day moving average and is preparing to test the 1.23 handle. Losses could extend toward 1.2250, the past two-month support, in the continuation of this week’s distinct down-trending pattern, but buyers will likely be tempted to join in below the 1.23 mark.
Activity on FTSE futures hint at a flat positive open on Thursday, despite a retreat in oil prices. WTI sees resistance near the $25 a barrel, although the US inventories data showed a significantly lower rise in stockpiles last week. The US oil inventories increased by 4.6 million barrels, versus 8.5 million expected by analysts and 9 million printed a week earlier.
On the Brexit deck, the lack of progress in negotiations means an increased probability of a no-deal Brexit provided that, if there is no concrete agreement by June 2nd, the UK will start preparing for a no-deal divorce. And Johnson’s position is firm, the UK is leaving the union the end of this year, with or without a deal.
The next round of negotiations is due next week, but with politicians busy with the coronavirus crisis, it may be difficult to find a compromise on both the UK and the European side.
Given that the possibility of a no-deal Brexit is not necessarily priced in sterling prices, the downside risks prevail. From a risk-to-return perspective, long sterling positions remain unappetizing both in short and medium run.