The market sentiment got hurt during the Asian session on geopolitical tensions between the two arch-rivals, India and Pakistan. I’m not sure what exactly has been going on there, but it was enough to hurt the sentiment which has been pretty upbeat recently and, as a result, stock markets retraced lower. We saw this as a good opportunity to go long on S&P500 since the trend has been bullish in the last two months and the overall sentiment remains positive given the positive tones from China and the US regarding trade negotiations.

Although, the biggest mover today has been the GBP as you’d expect, now that the deadline for Brexit is approaching. That said, the deadline which was supposed to be at the end of March, seems increasingly likely to be postponed by a few months at least, or up to a year. This has improved the sentiment for the GBP, which has gained nearly 150 pips so far today. So, the Brexit saga will carry on but that’s better than a no-deal Brexit, for now, hence the jump in GBP pairs.

GBP traders had another reason to be active today as Bank of England testified in the British Parliament for the inflation report hearings which take place on a quarterly basis. He mentioned rate hikes in case of an orderly Brexit and repeated that the fundamentals of the UK economy are sound. But he also banged the drums of the bears, but that’s what you’d expect because no one knows how Brexit will end up.

• German GfK Consumer Climate – The consumer climate in Germany used to be at 10.6 points in Autumn last year, but then declined to 110.6 points during the Winter period. Although in January, the climate improved for consumers and this indicator increased to 10.8 points. Today it was expected to remain at the same levels and the actual number came at 10.8 points. Although, we’ll have to see how the climate looks like when the US tariffs on European cars come.
• Germans Prepare for No-Deal Brexit – The chief of the German industry association Dieter Kempft said early today that German companies have no choice but to prepare for a disorderly Brexit. He expects a hard Brexit to shave at least 0.5% off German GDP. Politicians and companies can take contingency measures but impact will still be felt. If there is a hard Brexit, UK will probably slip into recession
• ECB’s Lane Speaking – ECB’s Philip Lane was speaking in Brussels today saying that data-dependent strategy provides flexibility. The labour market remains strong, there’s upward pressure in wages, and he’s confident that an underlying mechanism to raise inflation is still active. There’s been a sequence of negative shocks recently, although the ECB has not hit limits of its policy instruments. The current policy can cater to limited downside revision.
• BOE’s Vlieghe Testifies – On balance, after a no-deal Brexit the BOE will be likely to keep policy on hold or ease. Rate move direction will be a trade off between supporting economy and stopping temporary inflation overshoot. Damn, that will be hard for the BOE because the GBP will crash and inflation will surge, but the economy will head towards recession.
• BOE Chairman Carney Testifies – Carney testified at the Parliament today and the opening comment was that the fundamentals of the UK economy are sound. Well, economic numbers in recent months have shown otherwise, Mr Chairman. Brexit is creating tensions for consumers, businesses. But gradual rate hikes are needed if economy performs as expected. As expected? No one knows what to expect right now, not until Brexit is decided. BOE won’t reduce QE holdings until rate reaches at least 1.50%. This is positive for UK stocks. “No-deal Brexit will be inflationary”. I suppose we will see another GBP crash like the one we saw after the Brexit vote, that’s what Carney means. “The BOE will provide all stimulus possible in case of a no-deal Brexit, although it will be subject to price stability”. More inflation coming up in this scenario. “Inflation likely to stay above target in the medium-term. Near-term weakness in inflation has passed”. There hasn’t been inflation weakness in UK in the last two years since the Brexit vote, has it?
• DUP Party Still Against Brexit Extension – DUP leader, Arlene Foster, said a while ago that the Brexit extension doesn’t solve issues. Isn’t she right? She calls for legally binding changes to the backstop and has said that she will meet with Theresa May later today.

Bullish USD/JPY Again

1. The trend has been bullish for two months
2. The 200 SMA has providing support again on the H4 chart
3. The pullback is complete

The 200 SMA is still holding in USD/JPY

We decided to go long on USD/JPY again today. The 200 SMA moving average has been providing solid support during the second part of this week and the 50 SMA (yellow) has caught up as well and it is adding strength to the support, as you can see from the chart above. USD/JPY slipped lower this morning to the resistance area around 110.60s but the 200 SMA held its grown really well once again. Now this pair is turning bullish as it bounced off the 200 SMA.

In Conclusion

The sentiment got dented again today during the Asian and the European session, but it seems to be improving right now as the decline in USD/JPY and in stock markets has stopped. We are long on some risk assets and short on safe havens, so an improvement in the sentiment will be welcome.