Yesterday, the UK Conservative Party finally reached a deal with Northern Ireland’s Democratic Unionist Party (DUP) to back Theresa May’s minority government. The deal suggests that the 10 DUP MPs will vote for the Queen’s Speech, which will allow May to keep her job as Prime Minister. The Irish Party also committed to back the Tories in other key votes in the House of Commons.
Sterling reacted little to the announcement, as this deal had been widely anticipated and probably came as a surprise to nobody. Moving forward, the next risk event for the pound is the actual vote on the Queen’s Speech, expected to take place on Thursday. If all goes as planned and the Speech is passed, political uncertainty in the UK could dissipate further, and market focus is likely to turn to headlines surrounding the negotiating process. Monetary policy may also keep investors sitting on their hands, especially considering the divided views within the BoE Committee.
GBP/USD traded slightly lower on Monday after it hit resistance at 1.2755 (R1). During the Asian morning Tuesday, it hit support near 1.2700 (S1) and then recovered somewhat. Bearing in mind that the rate is still trading below the key resistance territory of 1.2850 (R3), but above the longer-term upside support line drawn from the low of the 7th of October, we consider the short-term outlook to be neutral. That said, we see the likelihood for the rate to trade higher heading into the Queen’s Speech vote on Thursday and get closer to 1.2850 (R3), given that the Tory-DUP accord lifts some political uncertainty.
If Cable manages to break above the 1.2755 (R1) resistance soon, then we may see it targeting our next resistance of 1.2815 (R2).
Draghi says rates have to be low for growth to recover
Speaking in Portugal yesterday, ECB President Mario Draghi maintained a somewhat dovish tone. The ECB chief defended the Bank’s massive stimulus program, indicating that interest rates have to be very low for economic growth to recover. This is no change in ECB rhetoric, which although it shifted to a less dovish bias at the latest policy meeting, it remained committed to keeping rates at current low levels. Thus, we keep our view untouched that the ECB is likely to continue to shift towards a more sanguine bias at its upcoming meetings, provided that incoming Eurozone data remain solid. Draghi will speak again today and tomorrow, but given that he already expressed his view, we don’t expect any major reaction from the euro, unless he provides fresh signals on policy. Besides the ECB President, focus is likely to remain on Eurozone’s preliminary CPI data for June, due out on Friday, which could prove critical to market expectations regarding the Bank’s next move.
EUR/USD slid somewhat yesterday after it hit resistance at 1.1220 (R1), to hit support at 1.1170 (S1). The pair has been trading in a sideways mode since the 19th of May, between the support of 1.1120 (S2) and the resistance territory of 1.1300 (R2). Thus, we believe that the near-term path remains sideways. However, given that on the 20th of June the rate started to recover after it hit the lower bound of the aforementioned range, we believe that there is scope for some further recovery, perhaps towards the upper end of the range at 1.1300 (R2).
Today’s highlights:
During the European day, we only get second-tier economic indicators. In Sweden, PPI data for May are due out while from the US, we get the S&P/Case-Shiller house price index for April, as well as the CB consumer confidence index for June.
Besides ECB’s Draghi, today we will also hear from Fed Chair Janet Yellen, San Francisco Fed President John Williams, and Philadelphia Fed President Patrick Harker. Market participants may focus primarily on Chair Yellen, and specifically, on whether she will support another rate hike this year, amid slowing inflation.
GBP/USD
Support: 1.2700 (S1), 1.2635 (S2), 1.2600 (S3)
Resistance: 1.2755 (R1), 1.2815 (R2), 1.2850 (R3)
EUR/USD
Support: 1.1170 (S1), 1.1120 (S2), 1.1075 (S3)
Resistance: 1.1220 (R1), 1.1300 (R2), 1.1380 (R3)
