The UK election ended with an upset, as Theresa May and the Conservatives failed to secure a majority in the House of Commons. The UK is now faced with a hung parliament, meaning that even though the Tories are still the largest party, they have to either rule with a minority or form a coalition with another party to be able to govern effectively. The pound plunged on the news, as this implies increased instability within Parliament and likely makes the Brexit negotiating process much more difficult, at least for the UK.
GBP/JPY collapsed as soon as the first exit poll showed that the Conservatives were unlikely to gain majority. The pair fell below the support (now turned into resistance) of 141.90 (R2) and managed to dip below Wednesday’s low of 140.70 (R1). The tumble was stopped at 139.60 (S1) and then, the rate rebounded somewhat. The price structure on the 4-hour chart still suggests a short-term downtrend, while the election dip confirmed a forthcoming lower low. We think that the pound could remain under pressure in coming days, at least until there is a clear plan about what happens next. We expect the bears to take the reins again soon and aim for another test near 139.60 (S1). A dip below that level could aim for our next support of 138.90 (S2).
Moving forward, we expect the pound’s forthcoming direction to be dictated by how the election outcome will impact the Brexit process and whether this increases the likelihood for a softer negotiating approach. Signs that the divorce may end up “softer” than what was anticipated up to now could lead to a notable rebound in GBP, we think. The questions in our mind are: Will Theresa May resign? If she does, will the new Conservative leader have a different (and potentially softer) view on Brexit? What if the Labour Party manages to establish a coalition of many parties and challenge the Tories? We expect the answers to these questions to play a critical role in how sterling behaves in the following days.
ECB: Less dovish guidance, but no tapering in sight
Yesterday, the ECB kept its policy unchanged. The most striking change in the accompanying statement was the removal of the easing bias that rates can be lowered further. Policymakers now expect rates to remain at current levels moving forward. Draghi’s press conference was eventful as well. The euro dipped initially, after he announced that even though the Bank upgraded its GDP forecasts until 2019, the inflation forecasts for the same period had been revised lower.
These downgrades likely poured cold water on expectations that QE tapering may be on the horizon. With inflation expected at 1.3% yoy in 2018, there is no rush for the ECB to consider scaling back its asset purchases. The common currency rebounded a few minutes later, after Draghi said the Bank removed its easing bias on rates mainly because the risk of deflation has disappeared. The key takeaway we got from this meeting is that the ECB is becoming more confident that inflation will eventually converge to its target, but it is still premature to discuss QE tapering at this stage.
As for the euro, even though it may underperform for a bit more, we remain optimistic on its broader path. The ECB is slowly but surely shifting towards a more sanguine tone, implying it could remove further dovish aspects from its guidance in coming meetings, if economic data continue to evolve as, or better than, projected.
EUR/USD traded lower as the ECB was not as optimistic as the market may have expected heading into the gathering. The pair is currently trading between the 1.1160 (S1) support and the resistance of 1.1240 (R1), while it still trades above the uptrend line taken from the low of the 17th of April. This keeps the outlook positive and as such, we would treat yesterday’s slide as a corrective setback. We expect the bulls to take charge again soon and perhaps aim for the 1.1300 (R2) territory. A break above that level would confirm a forthcoming higher high and is likely to pave the way for our next resistance hurdle of 1.1370 (R3).
Today’s highlights:
During the European day, we get the UK industrial production and trade data, both for April. In Norway, CPIs for May are due out. The forecast is for both the headline and the core rates to have declined. Further slide in the core rate could increase the likelihood for further easing by the Norges Bank and thereby, extend NOK’s latest losses.
In Canada, the unemployment rate to have ticked up in May following a notable drop in April, while the net change in employment is expected to have risen. We see the risks surrounding the unemployment rate forecast as skewed to the downside, considering that the Markit manufacturing PMI for the month reported one of the strongest rates of job creation in five-and-a-half years. A positive surprise could bring CAD under renewed buying interest.
GBP/JPY
Support: 139.60 (S1), 138.90 (S2), 138.15 (S3)
Resistance: 140.70 (R1), 141.90 (R2), 143.00 (R3)
EUR/USD
Support: 1.1160 (S1), 1.1110 (S2), 1.1075 (S3)
Resistance: 1.1240 (R1), 1.1300 (R2), 1.1370 (R3)
