It was a quiet data calendar to welcome the majority of markets back after the Easter break but anyone expecting a quiet session had their serenity broken by news PM May would be holding an emergency press conference. Speculation was rife and GBP didn’t know what way to go, initially selling off on uncertainty before PM May announced she would be holding a general election for June 8th. The result was a huge rally in GBP, the biggest one day gain since January 19th with GBPUSD up over 2.5% on the day, GBPEUR was up over 1.5% with GBP up between 1-2% across other pairs. The inverse correlation with the FTSE was evident as the stronger pound saw the UK primary index drop almost 2.5% on the day.
Without getting bogged down in the political landscape, the markets interpretation of the snap election, allowing PM to take advantage of her growing popularity in the polls will mean a softer Brexit, given expectations much of the opposition will be replaced and the political gamesmanship amongst parties that threatens to cause delays on Brexit negotiations will be eradicated. We’ll touch more on this in coming weeks as we add the UK snap election to the geopolitical minefield we are currently traversing, at least this time it’s a positive shock for GBP.
GBP’s huge rally brings pairs into long term resistance, GBPUSD is back trading above 1.2800 and into post referendum lows, which acted as support now turned resistance to moves higher. 1.2906 traded as the high but we are considerably lower from there now, only a break back above 1.3010 will really turn us bullish again but now is about as good a time we’ve seen for GBP sellers to get back into markets. EURGBP dropped like a stone in to support towards .8300 where we see key support, an area that has held EURGBP from moves lower since the last years Brexit vote, should this break there is a huge technical buildup that could well see EURGBP break back towards .7600 in coming months. A lot of big ‘if’s’ but the initial break of .8300 should see us trade back towards .8000 quite quickly. A word of warning, GBP pairs are flashing a number of overbought signals so we may well see a bull back if momentum fades. Data from the UK is light today so optimism may well fade.
Back to the broader markets and sentiment remains subdued. Stocks in both Europe and the US traded lower through yesterday, while the USD also found itself under heavy selling. The USD has struggled since Trump comments last week, the President once again casting shade towards Fed policy and the “strong dollar” as he perceives it, impacting the US economy. Trump makes it very difficult to actively forecast, we can make assumptions on Fed policy based on their guidance and how the economy is performing, however Trump coming out every 2/3 months with comments on the USD being too strong and concerns on interest rates rising really puts a spanner in the mix as it flies in the face of everything the Fed say, yet we persevere to try and find a balanced approach for assessing the outlook for USD.
US treasury yields continue to fall, concerns again on US frictions with North Korea, Syria, Russia and China driving yields in the US lower and further detracting from US strength. Today we’ll look towards the Fed’s beige book of economic activity to get some colour on the shape of the US economy, while some Fed speakers also cross the wires.
Euro action will be focused on CPI inflation forecasts due, the headline figure is not expected to have changed through March at 1.5%, with core inflation at .7%. There is also two ECB speakers due across the wires after lunch so any insight into policy will be welcome. EURUSD back above 1.0735/40 offers near term resistance to moves higher with larger sellers lined up above 1.0800, while support comes in around 1.0688 and 1.0650 area below should hold any intraday move.