(28 February 2020)DAILY MARKET BRIEF 2:The UK is struggling on its own

The US dollar index extended losses despite encouraging sales data. US durable goods orders fell 0.2% in January, less than 1.5% penciled in by analysts, as the fourth quarter GDP growth came in unchanged at 2.1%, as expected. More data is due today, but numbers will likely not suffice to spark any positive reaction from the market.

The EURUSD is drilling above the 1.10 offers, but the spread of coronavirus crisis within Europe should soon awaken the European Central Bank (ECB) doves as well. Germany has already announced it is considering a fiscal package to support the economy. Now that the Fed cut expectations topped, the potential for further US dollar slide has lessened, meaning that the single currency should meet stronger offers above the 1.10 mark against an already well-weakened greenback.

It is important for investors to understand that the actual sell-off is amplified by a general panic. This is the worst week since 2008 and the paranoia grows. Dip buyers are nowhere to be found as the global equity rout deepens. To us, it appears that the market has gone ahead of itself and a rebound should be around the corner. The coronavirus outbreak has certainly hit businesses, and it might have a longer-than-expected negative impact on company earnings and global growth. Yet the extension of the sell-off we are seeing may be a bit too dramatic, even compared with the significant downshift in valuations.

Market calamity will certainly leave its place to recovery at some point. We may not see a v-shape recovery immediately, but the expectation that the Fed would lower the interest rates should put a floor under the actual race to the bottom. With rising dovish expectations, the Fed may find itself under an untenable pressure to act in the coming meeting. Hence, a Fed intervention may be the only solution to calm investors’ nerves, and a game changer for the market.

Meanwhile, the UK is struggling on its own. The pound cheapened against all major currencies on Thursday as Johnson’s government threatened to walk away from Brexit negotiations and start planning for a no-deal Brexit, if officials can’t agree on a Canada-style trade deal by June. Rising prospects of a no-deal Brexit weighs on the pound. What keeps the sell-off in Cable contained is the weakening US dollar. Hence, price advances will likely see solid resistance into the 1.30 mark.

By Ipek Ozkardeskaya