Yesterday, the UK House of Commons voted in favor of the Queen’s Speech by a majority of 14 MPs. This implies that Theresa May will remain as the UK Prime Minister and that she will be the one managing the Brexit negotiations. However, we must note that May will now be in charge of a minority government with a slim majority in Parliament, which implies that her position is fragile and that she could be politically paralyzed at any time by just a few rebellious Conservative MPs, or a potential mutiny by the DUP. The reaction in sterling on the vote was relatively muted, possibly because this outcome was widely anticipated by markets.
With UK domestic political uncertainty now dissipating somewhat, the focus is likely to turn to headlines surrounding the Brexit negotiations, as well as monetary policy developments. In our view, the short-term outlook for GBP is cautiously positive, mainly due to all of the attention a potential rate hike by the BoE has attracted recently. Further signs in the next weeks that a policy move may be on the cards this year could work in favor of the pound. What might add fuel to such speculation? From a data perspective, solid PMIs for June that are due out next week and/or a potential pickup in wage growth prints that we will get the week after. In addition, any hawkish comments from the two BoE MPC members that have not expressed their views recently (Broadbent and Vlieghe) could suggest that the hawks currently outnumber the doves within the MPC.
EUR/GBP traded in a consolidative manner on Thursday, staying supported by the 0.8775 (S1) barrier. On Wednesday, the pair failed to overcome the 0.8870 (R2) obstacle and following Carney’s hawkish remarks, it fell below the short-term uptrend line taken from the low of the 10th of May. Therefore, we switch our view to flat for now. The pair shows signs that it may be establishing a sideways range between the 0.8870 (R2) resistance and the 0.8715 (S2). If the pair falls below its current support of 0.8775 (S1), then we may experience extensions towards the lower bound of the range, at 0.8715 (S2).
Nevertheless, a break below 0.8715 (S2) is needed to confirm a forthcoming lower low on the 4-hour chart and signal a short-term trend reversal.
The economic calendar is packed today:
From Eurozone, we get preliminary CPI data for June. The forecast is for the headline rate to have ticked down, but for the core rate to have held steady. We see the case for an upside surprise in the headline rate, considering that Germany’s rate actually rose, against expectations of declining. Even though such a positive surprise could support EUR a bit, given that the ECB has repeatedly indicated it is “looking through” changes in the headline print, we think markets will focus primarily on any surprise in the core print.
In the UK, the final GDP for Q1 is due out, and expectations are for the final print to confirm the 2nd estimate. In its latest meeting minutes though, the BoE anticipated the final print to be revised up. If this is indeed the case, it may enhance somewhat the case for a BoE rate hike by the end of the year and thereby, support sterling.
From the US, we get personal income and spending data for May. Expectations are for both the income and spending rates to have slid somewhat. We also get the core PCE index for May, but no forecast is available. We see the risks surrounding the core PCE rate as tilted to the downside, given the unexpected decline in the core CPI rate for the month. Considering that all of these indicators will be released at the same time and are expected to be on the soft side, USD could come under renewed selling interest.
USD/JPY tumbled yesterday after it hit resistance at 112.90 (R2), slightly below the downside resistance line taken from the peak of the 11th of January. In our view, yesterday’s slide shows that the latest recovery may be running out of steam and given our proximity to the aforementioned downside line, further declines may be on the cards. A clear dip below 111.80 (S1) is likely to challenge the 111.50 (S2) level, where a decisive break is possible to set the stage for more downside extensions, perhaps towards the 111.00 (S3) territory.
In Canada, GDP data for April are due out and the forecast is for a slowdown. However, given that retail sales for the same month surprisingly skyrocketed, we see the risks surrounding that forecast as skewed to the upside. Combined with potentially soft US data, a better-than-anticipated GDP print may encourage USD/CAD bears to drive the battle further below the psychological area of 1.3000.
We have only one speaker on the agenda: ECB Executive Board member Sabine Lautenschlager.
EUR/GBP
Support: 0.8775 (S1), 0.8715 (S2), 0.8640 (S3)
Resistance: 0.8820 (R1), 0.8870 (R2), 0.8945 (R3)
USD/JPY
Support: 111.80 (S1), 111.50 (S2), 111.00 (S3)
Resistance: 112.45 (R1), 112.90 (R2), 113.25 (R3)
