UK PM Theresa May has been on the receiving end of one of the largest political blunders in recent history and her position as Tory leader is now hanging by a thread. May went against her previous statement that she would not call a snap election to capitalise on her popularity at the polls. However, she went back on her word and in order to try and strengthen her hand for the upcoming Brexit negotiations, by overpowering the opposition and ending the political gamesmanship with Labour, Libs and SNP, which were frustrating efforts. This move has fallen flat on its face and what’s left is a Government, with no clear majority and now in a weak position as they look to enter the biggest negotiations the country has faced in over half century.
GBP dropped over 2% last night as exit polls released just after 10pm suggested the Conservatives would not win a majority and thus create significant uncertainty for the UK and Brexit negotiations. GBPUSD dropped from 1.2961 to 1.2714 but the declines have halted and while we did see lows of 1.2648 earlier, GBP has recovered somewhat. EURGBP surged higher, trading to .88595 and into the highest levels we’ve seen in 2017, exactly at the January high mark as well. The broader risk environment remains well supported this morning however, European share indices are higher, as is the UK’s FTSE, although the UK Mid cap index is trading lower.
What now for pound? We’ve always seen a hung parliament as the worst possible outcome for GBP, but from a reactionary standpoint, not necessarily long term. There are plenty calling for GBPUSD back to 1.2300 and EURGBP back over .9000 etc for us however, we think there is scope for GBP upside from here. Needless to say, what happens over the next few days is key. Should May leave, the bookies are pricing Corbyn as the next favorite to be PM, even without that the odds of a more reasonable Brexit process are higher as May’s hardline approach has only lost backing.
The pounds has failed to see accelerated declines this morning and that in itself is telling, this is far from a Brexit style fallout. 1.2600/1.2650 area appears to be a support zone for now, a rally back above 1.2750 however could well see GBPUSD look to regain higher ground once again. EURGBP finds resistance at the 2016 highs around .8860, while .8685 area acts as resistance. These are the broader ranges now for GBP as we watch how the rest of this story unfolds.
The ECB were across the wires yesterday and Mario Draghi did what he does best and tried to talk down the Euro. GDP estimates were revised slightly higher and inflation forecasts lower. There was some change in the language of the statement, the removal of “lower rates” suggesting the ECB are no longer looking to cut further but did suggest rates would remain at current low levels for considerable time. He also said they would remain ready to expand and extend QE if necessary, should conditions warrant it. He highlighted there was no discussion about “tapering” in the September meeting as well.
The Euro ran into selling from this, although I would have expected to see a larger decline. Many may have been waiting for the UK election risk to be removed before committing to Euro shorts once again. We’ve been pointing to the overextended Euro move and the unlikelihood of any tapering in the near term, if anything I would be more inclined to see the ECB extend their asset purchase beyond December, albeit at a smaller level. The Euro has a long way to drop should markets begin to liquidate some longs and the US are still on track to raise rates this month. 1.1110 really proves support for EURUSD, a break below there and we may well find ourselves back below 1.1000 quite quickly.