Sterling Tumbles as Conservatives Halved Lead Over Labour, Euro Marches On

Sterling trades broadly lower today on UK politics news. Prime Minister Theresa May’s Conservatives was originally having over 20pts lead over Labour back when May announced the snap election back in April. But according to the latest Survation telephone poll, the lead halved to 9% only. The poll put Conservatives on 43% while Labour at 34%. The election is seen as an important step for May to gain solid mandate for Brexit negotiation. And a less than satisfactory result could weaken May’s position.

Brexit Sec Davis warned of walking out

UK’s Brexit Secretary David Davis warned during the weekend UK could walk away from negotiation if EU demands EUR 100b divorce bill. Davis pointed out that ‘We don’t need to just look like we can walk away, we need to be able to walk away. Under the circumstances, if that was necessary, we would be in a position to do it.’

EU minister to meet in Brussels

Meanwhile, EU ministers meet in Brussels today to fine-tune Brexit negotiation positions. There is no formal position on the sum yet. European Commission President Jean-Claude Juncker said that amount is about GBP 50b. Luxembourg Prime Minister Xavier Bettlel estimated that to be between EUR 40b and EUR 60b. The Financial Times estimated the sum to be as high as EUR 100b. On the other hand, UK Institute of Chartered Accountants expected it to be as low as GBP 5b.

CEBR: Brexit could cost GBP 36b annually

In UK, an analysis conducted by the Centre of Economic Business Research (CEBR) for the Open Britain organization noted that the lost of EU single market in services after Brexit could cost UK companies up to GBP 36b annually. The reported pointed out that "about a third of the losses from single market withdrawal result from lost businesses in financial services." The impact could be particularly negative on financial services, telecommunications and transport.

It elaborated that "the free movement of services can also be seen to directly touch on immigration if people are coming to the UK to offer their services as self-employed individuals or if firms exercise their mobility rights while wanting to carry their workforce over." And, the overall impact on UK’s GDP would be between 1.4% and 2.0%, equivalent to GBP 25b to GBP 36b a year.

OECD: Growth in Germany and Japan picked up

The Organization for Economic Cooperation and Development said today that the combined economic output of its 35 members grew 0.4% qoq in Q1. That’s notably slower than Q4’s 0.7%. Notable slowdown is seen in US, France and UK. Overall EU growth slowed too but was not as deep. On then other hand pickups in Japan and Germany were clear and has offset some of the slow down in others. Still, economists are generally optimistic about Q2 and Q3. In particular, IMF projects global growth to be at 3.5% this year, revised slightly up from prior forecast of 3.4%. And if realized, that would be the quickest pace in fives years.

Euro optimism continues

Euro remains strong today and extends broad based rally on expectation of further strength in growth. Germany Bundesbank noted in the monthly bulletin that the country’s growth would be strong in Q2, following the impressive 0.6% growth back in Q1. Bundebank expected construction sector would continue to "flourish". Services sector is also expected to expand and give a lift to the labor market and wage growth. Consumer spending would be benefited from the developments. On the other hand, Bundesbank also warned that US President Donald Trump’s tax plan would hurt the US economy in the long run. It pointed out that the plan would lead to 30% jump in debt-to-GDP ratio within a decade.

Oil rally extends, OPEC to agree on production cut extension

Oil prices continue to surge ahead of an OPEC meeting this Thursday. Saudi Arabia’s energy minister Khalid al-Falih said "everybody I talked to… expressed support and enthusiasm to join in this direction" of extending the product cut agreement by a further nine months til next March. And, he’s optimistic that continuation with the same level of cuts, plus eventually adding one or two small producers, if they wish to join, will be more than adequate to bring the five-year balance to where they need to be by the end of the first quarter 2018." WTI crude oil is trading at 50.8 at the time writing, up 0.9% comparing to last week’s close. Recent rebound in WTI is expected to extend further to 53.76/55.24 resistance zone in near term.

Trump to deliver first budget proposal on Tuesday

US President Donald Trump will deliver his first major budget proposal on Tuesday. It’s reported there is a proposal for balancing the federal budget within 10 year through steep cuts to safety net and discretionary spending. One of the key point to note is possibly the massive USD 800b cut over 10 years on Medicaid. The Congressional Budget Office has estimated that this could impact healthcare benefits of 10 million low-income Americans over the decade. And, the inclusion of Medicaid cut is seen as significant by some analysts because there are clear rejections on it from a number of Senate Republicans. While the House has voted to cut Medicaid funding, Senate Republicans have already indicated that they would start from scratch. Such inclusion could further enlarge the division between Trump and some Republicans at the time of political turmoil in Washington.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1130; (P) 1.1171 (R1) 1.1246; More….

EUR/USD’s rally extends to as high as 1.1249 so far today. 138.2% projection of 1.0339 to 1.0828 from 1.0569 at 1.1245 is already met. At this point, we’ll stay cautious on strong resistance from 1.1245/98 resistance zone to limit upside and bring reversal. However, decisive break of 1.1298 will carry larger bullish implication and target 1.1615 resistance next. On the downside, below 1.1161 minor support will turn bias neutral first.

In the bigger picture, the case for medium term reversal continues to build up with EUR/USD now far above 55 week EMA. Also, bullish convergence condition is seen in weekly MACD. Focus will now be on 1.1298 key resistance. Rejection from there will maintain medium term bearishness and would extend the whole down trend from 1.6039 (2008 high). However, firm break of 1.1298 will indicate reversal. In such case, further rally would be seen back to 1.2042 support turned resistance next.

Economic Indicators Update