The British pound tumbled overnight, following the release of an election opinion poll by YouGov, which projected the Conservative party to fall short of a majority in Parliament by 16 seats (326 needed for majority). Such an outcome would imply a “hung parliament”, meaning that the Conservatives would need to form a coalition with another party, or govern with a minority. In both of these scenarios, Theresa May would likely have less domestic support than previously and as a result, her hand in the Brexit negotiations may be weaker.
Even though one should not take the results of a single poll for granted, we have to note that over the past few weeks, the gap between Conservatives and Labour has been steadily narrowing in almost all polls. So, even though this one showed a potentially extreme outcome with the Conservative party not being able to even establish a majority, most other polls confirm the story that Labour is slowly but surely catching up. If new polls show that this trend continues heading into Election Day next week, we would expect the British pound to remain under pressure, on speculation that this race may actually be closer than previously anticipated.
GBP/USD was trading marginally above the 1.2850 support (now turned into resistance) hurdle ahead of the release of the poll. The pair then dropped below that hurdle to hit support a few pips above the 1.2770 (S1) zone. Should new polls indicate that the Conservative – Labour gap continues to narrow over the next week, we would expect the bears to retake control at some point and push the price lower. A clear break below 1.2770 (S1) could pave the way for the next support at 1.2700 (S2).
Euro lifted by another media report about the ECB
The euro came under renewed buying interest yesterday, following a Reuters report that the ECB is set to upgrade its language about growth at the June meeting, and that the Governing Council will discuss whether to drop some aspects of its forward guidance that stimulus can be increased in the future if needed. We share the view for a more optimistic tone on growth. Policymakers could acknowledge that the risks surrounding the outlook for growth are no longer tilted to the downside but are instead “broadly balanced”, considering that growth-related data are very strong and that forward-looking indicators like the PMIs suggest this will likely continue.
However, we think it is far too early for the ECB to alter its forward guidance, by removing the signals that the QE program can be expanded and that rates could be lowered further in the future if needed. Even though policymakers could indeed discuss this prospect, we do not expect an actual decision next week. Such a rapid change in language could be over-interpreted by investors as a preliminary hint to tapering, which could result in a sharp appreciation of the euro as well as a spike higher in euro-area bond yields. What’s more, a couple of days ago, Draghi clearly said that an extraordinary amount of monetary policy support is still needed, including through the use of the Bank’s forward guidance. In any case, for now, market focus will be on the bloc’s CPI figures for May, due out today (see below).
Today’s highlights:
During the European day, Eurozone’s preliminary CPI figures for May will capture market attention. The forecast is for both the headline and the core rates to have declined. The focus will probably be on the core rate, which is anticipated to have declined to +1.0% yoy from +1.2% yoy previously. Even though this could hurt EUR somewhat, we doubt that such a modest pullback will materially curb speculation regarding a more optimistic tone by the ECB with regards to economic growth. We also get the bloc’s unemployment rate for April, which is expected to have declined even further.
EUR/JPY traded higher yesterday after it hit support near the 123.00 (S2) level, to break above the resistance (now turned into support) barrier of 124.00 (S1). During the early European morning Wednesday, it is trading marginally above that level and in case of a pullback in Eurozone’s core CPI rate, we could see the pair moving back below 124.00 (S1), and perhaps aim for another test of 123.00 (S2).
From Canada, we get GDP data for March. The forecast is for GDP growth to have risen following a stagnant print in February. The forecast is supported by the strong retail sales print, as well as the fact that net exports turned positive during the month. Indeed, in its latest policy statement, the BoC also noted that growth was very strong in the first quarter. In case of a strong print, CAD could extend its recent gains.
In the US, the Chicago PMI for May and pending home sales for April are coming out.
We have three speakers on the agenda: ECB Executive Board member Benoit Coeure, ECB Executive Board member Sabine Lautenschlager and Dallas Fed President Robert Kaplan.
GBP/USD
Support: 1.2770 (S1), 1.2700 (S2), 1.2600 (S3)
Resistance: 1.2850 (R1), 1.2900 (R2), 1.2950 (R3)
EUR/JPY
Support: 124.00 (S1), 123.00 (S2), 122.00 (S3)
Resistance: 124.50 (R1), 125.30 (R2), 125.80 (R3
