After the Conservatives defeat in Thursday’s UK election, the main question on most investors’ mind is: What happens next and how will this affect the Brexit negotiating process? On Saturday morning, PM May’s office said it had agreed an outline deal with Northern Ireland’s Democratic Unionist Party, in which the DUP would support the Tories on some key votes. Nevertheless, hours after the announcement, May’s office admitted that the accord is not yet finalized.
Meanwhile, the leader of the Labour Party, Jeremy Corbyn noted that he will put forward an alternative government program and invite lawmakers to vote for it, hoping that MPs will vote down the Queen’s Speech, which is scheduled on the 19th of June (the same day as UK-EU negotiations are set to begin).
‘I think it’s quite possible there’ll be an election later this year or early next year, and that might be a good thing because we cannot go on with a period of great instability’, Corbyn also noted.
The defeat of Theresa May and the Conservatives may be seen as a rejection of her ‘hard Brexit’ stance by the British people. As such, she may have to soften her approach. If so, something like that could be interpreted as positive for the pound, but given the current uncertainty surrounding the agreement with the DUP and the Queen’s speech, we expect sterling to remain under pressure in the short run.
GBP/USD rebounded from slightly above the 1.2615 (S1) support zone on Friday, after it collapsed from near 1.2960 on the election’s first exit poll. At the time of writing, the pair is testing the 1.2770 (R1) as a resistance, where a decisive break may open the way for the 1.2850 (R2) territory. Nevertheless, given that the pair is now trading back below the key hurdle of 1.2850 (R2), and also below the downside resistance line taken from the peak of the 18th of May, we would treat any possible intraday recovery as a corrective phase. We expect the bears to take the reins again soon, and perhaps drive the battle back down near the 1.2700 (S1) support. A dip below that level, may set the stage for a test at the next support of 1.2615 (S2).
CAD strengthens on stellar employment gains
On Friday, Canada’s employment report showed that the economy added 54.5k jobs in May, beating estimates of 11k. The employment gains were driven by the 77k increase in full-time jobs, which more than offset the 22k slide in part-time employment. The unemployment rate ticked up to 6.6% from 6.5% in April, but this was due to the entry of 78.4k people into the labor force.
USD/CAD slid on the release as these encouraging news increase the likelihood for the BoC to maintain its balanced tone at its upcoming policy gathering, on the 12th of July. The pair fell below the support (now turned into resistance) of 1.3485 (R1), to stop once again near the 1.3420 (S1) zone. The pair has been trading within a sideways range between that level and the resistance of 1.3540 (R2) since the 25th of May and as such, we consider the short-term outlook to be flat for now. However, given that the rate is trading below the important territory of 1.3600 (R3), we see the likelihood for the pair to trend lower again in the foreseeable future. A dip below 1.3420 (S1) could confirm the case and may initially aim for our next obstacle of 1.3380 (S2).
As for today, we have a relatively quiet day, with no major events or indicators due to be released.
As for the rest of the week:
On Tuesday, we get the UK CPI data for May. Also, the new UK Parliament meets for the first time. On Wednesday, all eyes will be on the FOMC policy decision. The Fed is almost certain to hike rates and thus, the focus will be on any signals regarding the pace of future hikes. As for the data, we get US CPI and retail sales for May. The UK employment report is also coming out. On Thursday, the BoE and the SNB hold their meetings. Neither Bank is expected to alter its monetary policy. On the indicators’ front, we get New Zealand’s GDP for Q1, Australia’s employment figures for May, and UK retail sales for the same month. Finally on Friday, we have a BoJ gathering. The Bank could shift to a slightly more upbeat tone given the recent improvement in Japan’s economic data.
GBP/USD
Support: 1.2700 (S1), 1.2615 (S2), 1.2515 (S3)
Resistance: 1.2770 (R1), 1.2850 (R2), 1.2910 (R3)
USD/CAD
Support: 1.3420 (S1), 1.3380 (S2), 1.3335 (S3)
Resistance: 1.3485 (R1), 1.3540 (R2), 1.3600 (R3)
