“Perfect storm” finally arrives
You wait weeks for an event to move the market and three arrive on the same day!
The “snap” election takes place in the U.K. today. Over what has seemed the longest seven weeks in history, Theresa May’s Conservatives appear to have blown a 25% lead! But have they really? We will know soon enough. Opinion polls have become something of a joke over the past three major votes with David Cameron, Donald Trump and Leave being the main beneficiaries.
The pound has reacted mostly positively despite poor opinion poll results. Against a sickly dollar, the pound has managed to hold onto the majority of its gains. The Euro, buoyed by political stability, has gained almost five percent over the same period.
The 1.3000 and 0.8700 levels are the first major hurdles for Sterling. If they are broken later today then traders could see the pound appreciable higher tomorrow.
Liquidity will be key. The Gbp/Usd rate has been the victim of a lack of, or at least the disappearance of, liquidity a few times recently leading to “flash Crashes” of varying significance.
ECB Meeting more about hope than expectation
Those who see a continued upward path for the single currency will be hoping Mario Draghi casts off the shackles and gives advance guidance of a change in monetary policy later this morning.
There are three degrees of expectation: change the easing bias to neutral, adjust the Asset Purchase Programme and a rate hike. The likelihood is for possible discussion but no action. A small correction for the Euro would be the outcome.
Today also sees the release of the final cut of Q1 GDP for the Eurozone. Growth is expected to remain at 1.7%, entirely respectable for this stage in the economic cycle. This is not, however, accompanied by inflation which is benign across the whole region.
Even in Germany where there is a fanatical fear of inflation, last month’s data showed a fall from 2% to 1.5% YoY, the lowest rate of increase since 11/16.
Economic data Eurozone-wide has been generally supportive for the common currency but without definitive action expectation will wane and the 1.3000 resistance will remain intact.
Trump on Comey’s radar
James Comey, the former FBI Director testifies today before the Senate Intelligence Committee. This will take place behind closed doors but the effect of his statement has the potential to be highly significant for Donald Trump’s Presidency.
The first question is: can he survive. The likely answer is probably. Can he escape impeachment and censure? It’s harder to answer this. If he doesn’t, does it really matter? Well, from the perspective of his ability to pass his agenda through the administration, yes it does. Bill Clinton, ironically the last President to be impeached, found his job far more difficult post “Lewinskygate”.
What does it mean for the dollar? Well, the interest rate differential is already significant. Will the FOMC want to hike again during uncertainty? That is a more difficult proposition. The answer is probably yes given that they are, supposedly, relying on data.
A day for Conservatives and conservatives
It is likely that the Governing Conservative Party will win the election on the U.K. It is the size of the majority that will determine the short-term direction for the pound.
Volatility will return but the size of ranges will depend, as already mentioned, on liquidity. We will see. Be conservative and alert. Cautious in taking positions and be sure of entry and exit points.
