Market News & Insights
20 April 2017

Euro Firm Into Huge Risk

Quite often, the day after a surprise market moving event (like the snap election announcement) we see consolidation in markets as participants weigh up the next move. Will it be a continuation of the breakout? or will there be a corrective retracement? GBP experienced just that yesterday, trading just back off its Tuesday highs, the pound ebbed and flowed in narrow ranges, some of its gains were given back but most likely on profit taking from the move higher, rather than a reversal of the move. In parliament, a landslide majority approval vote for the election caused little reaction in GBP, and the UK will now once more be on tracks towards the polling stations.

Once again, the rally in GBP has been on optimism that PM May’s call to the electorate will see the struggling Labour party crushed, while also hoping to cut into the SNP’s stranglehold in Scotland. The expected result would be a significant majority in Parliament for the conservatives and as such provides May with some breathing room on Brexit negotiations as with majority support she can then take a softer approach on Brexit negotiations without fear of causing consternation or revolt within Parliament from Brexit hardliners, nor threaten her power. The end result being the UK could ease up on some of their more aggressive/outrageous demands and as such lead to a more amicable split with the EU. That is the theory at least. What direction the pound takes will still fall back to market expectations of a hard or soft Brexit. BOE’s Mark Carney speaks a couple of times today and markets will be keen to see if he provides any guidance or commentary on policy. GBPUSD traded towards 1.2770 overnight but we are back above 1.2800 today, with sellers lined up once more from 1.2860 to 1.2900.

It was a mixed day for the Euro yesterday, inflation data was as expected and while the Euro rallied from lows against GBP, it struggled through much of the European session against the USD, while this morning the single currency has been in demand pushing it higher across the board.

There were several ECB speakers across the wires through the day, and while they seemed to suggest the ECB would would shortly be approaching the time when they will need to begin to discussing scaling back easing, they also warned of some concern around inflation, continuing with their mantra that they believe CPI is currently overstating real inflation. Eurozone consumer confidence comes in the afternoon but into the weekend focus for the single currency will likely be on the French elections. Current polls suggest Macron is on 24%, Le Pen 23% with Fillon and Melenchon on 19% each. There is a considerable number of “undecided” voters out there so the reality is that any of the above could get through to the final 2 in second round of voting and that is where the big risk lies for Euro. EURGBP still needs to break below .8300 if we are to have any further downside, while EURUSD is pressing higher towards 1.0830 where we see resistance once again with 1.0910.