Today, all eyes will be on the UK General Election. Even though the Conservatives have lost some of their poll-lead recently, they are still expected to secure 43% of the vote, with Labour tracking behind them at 36%. Since a Conservative victory is widely anticipated, if this is indeed the case, market focus may be on how big of a majority the party secures in the House of Commons.
A strong showing that gives them a large majority could prove positive for sterling, on the grounds that PM May could strengthen her hand in the Brexit negotiations with the increased support she will gain. That said, given sterling’s sharp rally after May announced the election, most of the good news may be priced in already. Thus, we believe that any upside in the pound is unlikely to be massive. GBP/JPY bulls may take the opportunity to extend yesterday’s rally and perhaps drive the battle above the resistance of 143.00 (R1), and the downtrend line taken from the peak of the 10th of May. Such a break could initially aim for our next resistance of 144.00 (R2).
The surprise here and thus the risk for sterling, would be a poor showing by the Conservatives, which leaves them with only a marginal majority in Parliament. In that case, the pound may come under selling interest and GBP/JPY may fall below 141.90 (S1), perhaps targeting the 140.70 (S1) support, marked by yesterday’s low.
The worst-case scenario is no majority at all. This implies the Conservatives would need to form a coalition with another party, or govern with a minority. In both of these scenarios, Theresa May could lose a lot of her negotiating power. Therefore, we expect GBP/JPY to tumble below the round number of 140.00 (S3) in this case, something that may pave the way for the 138.00 zone.
ECB meeting: Too soon to change tune?
In Eurozone, the main event will be the highly-anticipated ECB policy gathering. With no expectations for any change in policy, market focus will be on whether the Bank will shift to a less dovish bias. Media reports suggest policymakers will likely indicate that the risks surrounding the growth outlook are no longer tilted to the downside but are instead “broadly balanced”. These reports also suggest officials will discuss whether they should drop some dovish aspects of their forward guidance- that QE can be expanded and that rates can be reduced further if needed.
We share the view for an upgrade in the growth assessment, but we think it is too early for the ECB to alter its dovish forward guidance. A rapid change in language could be over-interpreted by markets as a preliminary hint for tapering, which may result in a sharp appreciation of the euro as well as a spike higher in euro-area bond yields. We don’t expect the ECB to risk something like that, especially since it is not clear whether the recent upswing in the core inflation rate is self-sustaining and durable, as Draghi recently pointed out.
Draghi also noted that an extraordinary amount of monetary policy support is still needed, including through the use of the Bank’s forward guidance. Unchanged guidance may come as a disappointment for investors looking for such hawkish changes and thereby, lead to a pullback in the euro. EUR/USD may retreat for another test near 1.1200 (S1), where a break could aim for the next support of 1.1160 (S2). Nevertheless, given that the price structure still suggests a short-term uptrend, we would tread any setback that stays limited above the uptrend line taken from the low of the 17th of April as a correction.
Comey’s testimony: Smoking gun or non-event?
Last but not least, in the US, former FBI Director James Comey will testify before Congress. The testimony will likely center around whether President Trump attempted to influence an FBI investigation regarding ties between Trump’s prior advisor Michael Flynn and Russia. Markets may pay attention to this event as it could hold implications for Trump’s tax-reform agenda.
If Comey confirms Trump asked him to drop the investigation, we could see renewed political turmoil in Washington D.C. Investors could begin to question whether Trump can be impeached and consequently, whether he can implement the reforms he has promised amid a political maelstrom. Such concerns could weigh on the dollar. Comey’s prepared remarks suggest that he is unlikely to do so, though surprises during the Q&A session are always possible.
Support: 1.1200 (S1), 1.1160 (S2), 1.1110 (S3)
Resistance: 1.1300 (R1), 1.1370 (R2), 1.1430 (R3)
Support: 141.90 (S1), 140.70 (S2), 140.00 (S3)
Resistance: 143.00 (R1), 144.00 (R2), 145.45 (R3)