Yesterday, in a surprise for the markets move, British PM Theresa May announced that she will seek an early election on June 8th in order to strengthen her hand going into the UK-EU divorce negotiations. "Every vote for the Conservatives will make it harder for opposition politicians who want to stop me from getting the job done" she said in her speech. However, in order to be able to hold an election, the Prime Minister must gather the support of two-thirds majority in the lower chamber of Parliament, the House of Commons. The vote is scheduled for today, and with the Labour party favouring a new election, May is very likely to get it through.
The pound tumbled a few minutes before May’s speech, on rumours that she will call for snap election. Nevertheless, it rebounded at the confirmation, erasing all the rumour-related losses and gaining even more. This is a “sell the rumour, buy the fact” market reaction and reminded us the 17th of January, when Theresa May announced her negotiating plans. A couple of days ahead of the scheduled speech, sterling fell on leaks of her plans. When May actually delivered, the currency surged.
In our view, yesterday’s rally may have been fueled further by speculation that a new government may negotiate a softer Brexit process or even cancel it altogether. However, based on the most recent opinion poll, the Conservatives are in the driver’s seat, which increases the likelihood for May to enter the negotiating process with a stronger mandate.
GBP/USD surged on May’s call, and continued to trade north throughout the whole day. The rally was stopped by the 1.2900 (R2) level and then, the rate immediately retreated to settle slightly below the 1.2850 (R1) key territory, which happens to be the upper bound of the medium-term sideways range that has been containing the price action since the 7th of October, between that area and the 1.2100 support zone. We prefer to wait for a clear close above the 1.2850 (R1) area before we get confident on larger upside extensions.
Today:
Besides the UK parliament vote, today we have Eurozone’s final CPI for March and three speakers. Expectations for Eurozone’s CPI are for the final print to confirm the preliminary estimate, so we expect the market reaction in the euro to be muted.
As for the speakers, from the Fed, we have Boston President Eric Rosengren. From the ECB, Board members Peter Praet and Benoit Coeure will speak. Following the Reuters report that the market has over-interpreted the signals from the March ECB meeting, it will be interesting to hear from them, especially ahead of next week’s policy gathering.
EUR/USD traded higher yesterday, breaking above the resistance (now turned into support) of 1.0700 (S1) to stop slightly below 1.0740 (R1). Any comments from the aforementioned officials that the ECB is not planning to start reducing its stimulus program any time soon may bring the pair back below 1.0700 (S1). As for the bigger picture, we believe that the outlook remains neutral. The pair remains below the downtrend line taken from the peak of the 3rd of May, but also above the upside support line drawn from the low of the 3rd of January.
GBP/USD
Support: 1.2770 (S1), 1.2700 (S2), 1.2615 (S3)
Resistance: 1.2850 (R1), 1.2900 (R2), 1.2940 (R3)
EUR/USD
Support: 1.0700 (S1), 1.0675 (S2), 1.0640 (S3)
Resistance: 1.0740 (R1), 1.0770 (R2), 1.0800 (R3)
