It’s a little less than 24 hours before the polls open and the UK decides who will lead them into arguably the toughest negotiations the country has faced in over half a century. The weekend’s atrocities in London have taken much of the focus away from the election trail but GBP continues to trade within recent ranges, we’ll chat more about potential outcomes later.
In Europe, the single currency remained well supported ahead of tomorrow’s ECB meeting and it feels like with significant event risk on the horizon tomorrow that markets prefer to play the wait and see game. General risk appetite was subdued with European stocks extending their weeks decline with major indices down over .5% this week. It was a similar story from the US session with indices closing the day lower, albeit off their lowest levels. The USD also struggled to gain any footing, the USD index still trades around 8 month lows even with the potential for a June rate hike still on the cards, the greenback cannot pull itself higher which leaves it very vulnerable. There’s over a 90% probability priced the Fed raises rates according to Fed funds futures, if they don’t, how low can the USD go?
There’s a feeling that no matter what the outcome, Theresa May will be walking away from this election with egg on her face. As this point, the polls are probably too tight to call, recent experiences have suggested that 5-6% in polls carries little weight once the polling stations open and for May and the Conservatives the fact they gave up over a 20 point lead to be in this position should be deeply concerning. Public opinion has certainly shifted and if the election trail was two weeks longer who knows where it would finish. As it stands bookmakers are pricing about a 10% probability of a Corbyn/Labour victory and to be honest that would have its upsides for GBP as well, especially if we revert directly to a more agreeable Brexit process.
The real issue is if the Tories fail to seal a majority and once again we have a fractious government leading us into Brexit negotiations due to start in two weeks. Hailed as a Conservative V Labour Coup de grace several weeks ago when first announced, it may be a Napoleonic Waterloo by the end of tomorrow. Inside ranges continues for GBP but we’ll be looking for major breaks, by this we mean GBPUSD to break above 1.3050, or back below 1.2765 for any continuation of direction. EURGBP a break above .8800 will be key, while a break below .8652 should see additional downside. There will be plenty of noise and false moves in the next 24 hours, but Friday morning will be the real tone setting for GBP.
The ECB is due tomorrow and while we are not expecting any change to be announced tomorrow, the market needs to hear that scaling back QE has been discussed. If it has not and Mario Draghi continues to toe a cautious line, the Euro will almost certainly sell off. From a speculative position the Euro has more net long than any time in over 2 years, that shows how heavy speculation is on the ECB beginning to taper. If they do not, or show no indication of it, then the Euro will almost certainly start selling and EURUSD will be eyeing back below 1.1120. The OECD economic outlook crosses the wires today but its impact on ECB expectations will likely be limited, unless at extremes of growth/decline. EURUSD still held by 1.1280 to 1.1290 area where we run into sellers, while 1.1120/1.1090 supports for now. Only a break of these areas will change the general view of that range.