$EURUSD momentum indicators bearish but support near
Trending Update 30th May G10 FX outlook
Nikkei fell 0.5% initially but recovered late in the Asian session to close almost flat (-0.02%) for the day. The European equities have also opened sharply lower with FTSE, DAX and CAC40 down 0.6%, 0.4% and 0.9%, respectively. In terms of the G10 FX, GBP is number one and USD is number 8 followed by SEK at number 10 (the weakest currency today). SEK weakness was due to the Swedish Q1 GDP miss (0.4% vs. 0.9% expected). The Swedish Q4 GDP growth rate was also revised down from 1% to 0.7%. The saving grace was SEK was the April retail sales which came in strong (1.3% vs. 0.5% expected)
Overnight, the Japanese retail sales came in strong above expectations while unemployment rate came in unchanged at 2.8% as expected. Elsewhere Norway’s retail sales were also above expected.
The EUR TWI fell sharply on Monday but is flat for Tuesday with a Doji candlestick pattern seen so far. In our view short-term risk to the EUR downside have increased; that said, there are some key releases today including the Euro-area business confidence at 0900 GMT and German Inflation rate (flash) at 1200 GMT. We will need improved numbers to keep the positive EUR sentiments going.
As for USD risks are now skewed to the upside as most of the bad news is priced in and June rate hike is still very much going ahead (given messages from Fed speakers last week). Also, there is PCE data and the US Non-farm payrolls due later in the week (expected to show strong numbers).
Trending Update 31st May
GBP is choppy moving from one election poll to the next. We are now seeing some sharp dip in Sterling after the YouGov poll forecasted a hung parliament. We see GBP weaken over the coming days as uncertainty over the UK elections grows. Levels to watch on EURGBP on the top side are .8750 and .8790 and on Cable are 1.2762 (21 April low) and 1.2705 (February highs).
The German retail sales came in weaker than expected (-0.2% actual vs. 0.2% expected) while unemployment rate came in unchanged at 5.7%. The unemployment numbers fell by less than expected (-9K actual vs. -15Kexpected). The EUR has had a muted response and we expect moves to be limited ahead of the composite the Euro-area CPI (flash) at 0900 GMT where any surprise will lead to short-term EUR response. Levels to watch on EURUSD are 1.1150 and 1.1200 just after the release and 1.1100 and 1.1265 by end of the day.
In the US session, the Canadian Q1 GDP is due at 1230 GMT; after a slightly hawkish BoC, the risk to CAD is skewed to the upside. The WTI front month is down 1.5% at $49.10 after testing the $50 mark yesterday. That said, the outlook on oil still remains constructive as Oil is still above the OPEC meeting lows and USDCAD bears are very much in play. Also, we see improvement in commodity currencies as risk appetite returns.
GBP outlook ahead of the UK Election Wednesday 31/05
GBP has come under attack as polls have narrowed ahead of the UK General Election on the 8th of June 2017. The Conservatives have gone from a lead of 18 points over Labour to 7 points (according to some prominent polls) since the general elections were called on 18th April. The fringe parties like the Liberal Democrats, UKIP and Green have been decimated as vote share has concentrated around the two main parties.
The cause of the latest chatter on the trading desks was the You Gov Projection piece for the Times where the pollster predicted a hung parliament on June the 8th. You Gov carried out a projection based on 50000 interviews as supposed to a normal survey with a sample size of a couple of thousands.
The projections showed that PM Theresa May will win 310 seats (out of 650 seats) which mean that conservatives will come down from their previous tally of 331 seats (a majority) in the previous general elections. The Labour will be number two at 257 seats which also means there will be a hung parliament.
The Times reporter Sam Coates who published the predictions has already said that these results will be updated daily which will keep the GBP choppy unless we see a clear trend. That said, there are some questions regarding the methodology used by YouGov with the Independent and the Guardian already calling it controversial. Also, there is an error rate according to which Conservatives may achieve 345 and Labour 227, hence these projections should be taken with a pinch of salt.
YouGov predictions have pushed GBP lower but the market has already started to question these forecasts as the latest polls (PanelBase and Kantar) showed Conservatives still having a healthy lead of over 10 points. The election polls will need to confirm the You Gov predictions and polls will have to confirm each other. The bottom line is that the market will need a consistent trend in polls against PM Theresa May over the next seven days for GBP to drop sharply. In our view, GBP weakness is further to run if polls continue to narrow. That said GBP may remain choppy if poll keeps contradicting each other.
In terms of levels to watch before the results;
Support Resistance
GBPUSD 1.2772 1.2902
EURGBP .8656 .8787
What is likely to happen if Theresa May wins;
We expect GBP to improve because her stance on Brexit is more or less known and the market will see her win as “business as usual”. Also, inferring from the Conservatives manifesto it is likely that public spending cuts will be deep and fiscal discipline will be stringent. That said there can be some risk if May comes in with a slim majority as it will make it difficult for her to negotiate Brexit and pass important legislations through the House of Commons.
Conservative Majority (340 seats or above)
GBPUSD 1.2989
EURGBP .8600
Conservative Majority (340 seats or below)
GBPUSD 1.2800
EURGBP .8787
What is likely to happen if there is a hung parliament?
In a scenario of Conservatives missing the 326 mark, there will a hung parliament with a lot of uncertainty over Brexit and fiscal policy, given Labour and Conservatives divergent views.
Hung parliament (325 seats or below)
GBPUSD 1.2615
EURGBP .8849
We don’t see a majority or a coalition that could see the Labour government in power but in such a scenario GBPUSD and EURGBP could hit 1.2550 (-2%) and .8900 (+2%).
AUDUSD bouncing from support but bearish
Trending Update 01/06
In the latest of polls, YouGov has now shrunk Conservatives lead to 4 points over Labour from 10 points earlier. This will weigh on GBP unless other polls continue to contradict this. The Manufacturing PMI came in at 56.7 above the 56.5 expected; we see no real impact as the focus remains on the UK election.
EUR TWI has now started to weaken post weaker than expected CPI even though EURUSD improved. As we have said before, the risk to the EUR downside has increased as the ECB policy meeting on 8th June is too early to give a hawkish message, especially with uncertainty stemming from the UK elections.
The Caixin Manufacturing PMI came in below 50 at 49.6 for the first time in over 11 months and this has pushed AUD to new two-week lows despite the Australian retail sales coming in strong. Elsewhere, the Nikkei 225 rose 1.07% to close at 19860. The European equities also opened higher with FTSE and DAX currently trading +0.35% and +0.44%.
The USD index is up for the day but moves have been choppy. We don’t see much change in the dollar outlook before the US NFP data on Friday. That said we expect USD to improve a little from the lows seen on the last trading day of May. The US ADP employment change and ISM Manufacturing PMI data are due later today at 1215 GMT but we expect moves to be limited whatever the outcome.
Trending Update 02/06
Nikkei 225 had a strong day closing at 20177, up 1.6%, above the 20K mark for the first time in 18 months. The European equities have also opened higher with FTSE, DAX and CAC 40 up 0.4%, 0.8% and 0.6% higher. In the energy space, the WTI has taken a turn for the worse falling sharply (currently at $47.40) despite the DoE inventory data showing oil stockpiles falling faster than expectations. This is weighing on the commodity bloc currencies with CAD and NOK among the weakest currencies for the day.
The dollar has so far gained versus the risky currencies (the exception being NZD) while being relatively flat versus the safe haven currencies ahead of the US NFP at 1230 GMT The Fed rate hike in June is now fully priced and hence, there is little for USD to be gained from expected job numbers. In our view, USD is now vulnerable to a downside surprise. That said an NFP figure above the 200 mark may lift USD over the short-term.
GBP is once again the weakest currency for the day; the narrowing polls have almost doubled the implied volatility. In our view, GBP has more downside risk from polls narrowing than upside potential from polls widening.
Market Macro Wrap 02 June 2017
USD consolidated at the start of the week but we have seen sharp sell-off since the last trading day of May. The sell-off is partially due to the US NFP miss and a lack of US positive catalyst as June rate hike is fully priced in and there is still three more US jobs report between September rate hike and now. The US 10 year yield is also now at its lowest since mid-November 2016. That said, the market is still under pricing a December rate hike by 50% and hence, USD medium-term outlook doesn’t look too bad.
GBP was choppy throughout the week with Sterling swings largely driven by the UK election polls. In our view, GBP has more downside risk from polls narrowing than upside potential from polls widening. The UK election results will start to trickle in from around midnight on 8th June with results likely to become clear by 0200 GMT.
EUR, CHF and JPY are the top gainers for this week. JPY has risen due to rising yields and narrowing US and Japan yield differentials while EUR has risen due to chatter over a hawkish ECB on 8th June. The Risk sentiments haven’t worsened much but falling Crude prices have ensured that the commodity currencies have a bad week. NZD is the only exception boosted by a strong business confidence and better terms of trade.
Apart from the ECB and UK general election next week we will also have the RBA policy meeting, the Australian GDP, the Canadian jobs report and the Chinese trade balance.
Trending Update 05/06
USDJPY is consolidating in a narrow range since the Asian open and the Nikkei 225 has also closed just 0.03% lower. The European equities have also opened mixed with FTSE and CAC 40 up 0.2% and 0.05%, respectively and Italian MIB and IBEX down 0.1% each. In terms of the energy space, the WTI front month has recovered from Friday’s close now inching above the $48.0 mark.
In the FX market, the commodities currencies are the best performer (NZD the only exception) with safe haven currencies the worst. That said, the moves have been small except for AUD which is up 0.63% versus the USD. In terms of data, the Caixin services PMI was healthy (52.5) and the Euro-area services PMIs (final) was also revised upwards.
Looking ahead, the UK services PMI may be a non-event given the focus on the UK election on 8th June. The latest survey poll by Survation has now given the Conservatives a 1 point lead over Labour, however, the sample size was fairly small (1049) compared to the other polls (approx 2000). To read our article on how to trade GBP ahead of the UK general elections click here. To know 5 most important things about the UK election read our article in Market watch.
As for EUR, the market is in buy rumour sell fact mode; ever since the rumour of a possible shift in the ECB policy stance has come to light we have seen the EUR edge higher. This means that if ECB disappoints on Thursday, very likely given the UK election risk, we are likely to see EUR sell-off.