Trending Update 06/06
USDJPY fell sharply and the Nikkei 225 also fell 0.95%. The European equities have also opened lower with FTSE, DAX and CAC 40 down 0.1%, 0.4% and 0.6%, respectively. In terms of the energy space, the WTI front month has moved lower below last week close.
In the FX market, there is no real theme with NZD and JPY number one and two, EUR and NOK number nine and ten. In terms of developments overnight, RBA left key rate unchanged and AUD initially inched higher. That said, the Key resistance is still intact on AUDUSD.
The UK election on 8th June still remains the market focus with surveys now straying widely from each other. The latest survey poll by ICM has now given the Conservatives a 11 point lead over Labour.
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.
$EURJPY testing key support
Short term analysis EURGBP
Trending Update 08/06
The key events for today are the ECB policy meeting, the UK General election and Comey testimony and this will ensure plenty of volatility in the FX markets.
In terms of the UK election, the polling is already underway and the ballot will close at 2100 GMT at which point exit polls will be released. The first results will start to trickle in from 2300 GMT and winner will most likely be known around 0200-0300 GMT. A narrow victory for Theresa May (around 340 seats or below) is unlikely to push GBP significantly higher while a slim majority or a hung parliament will see GBPUSD fall to 1.2615.
In terms of ECB, it will be difficult for Draghi to deliver a hawkish message given the leak on Wednesday which suggested downward revision to inflation forecast. Also, the market has already bought EUR in anticipation of a hawkish ECB; hence, downside risk EUR sell-off from a dovish ECB is high.
Comeys Testimony was released late during the NY session and he did not make any accusation but expressed concerns on Trump’s behaviour. Hence, the event risk from his testimony in an open hearing at 1400GMT is diminished.
In terms of the market action so far, Nikkei 225 has closed 0.38% lower. The European equities have opened firmer with FTSE, DAX and CAC 40 up 0.1%, 0.1% and 0.2%, respectively. In terms of the energy space, the WTI front month fell sharply (consolidating at $45.90 today) following the release of the EIA Crude inventories which showed a sharp rise in oil stocks. Despite this Commodities currencies have outperformed safe haven currencies.
Trending Economic 09/06
The verdict from the UK General election is a hung parliament with Conservatives forecasted to win 319 and Labour 270. We targeted 1.2615 on GBPUSD and .8849 on EURGBP in our Pre-election piece in this scenario. In terms of the latest developments, BBC reported that Theresa May is unlikely to resign on this verdict and given that the Democratic Unionist Party (from Northern Ireland) has won 10 seats and had already expressed support for the Conservatives prior to the Election, there is likelihood that DUP and Conservatives form a possible Government. Elsewhere, the Brexit talk are not going to commence on 19th June as planned earlier.
In terms of the market action so far, Nikkei 225 had closed 0.52% higher jumping above the 20000 mark once again. The European equity futures have also opened firmer with FTSE futures, DAX and CAC 40 up 0.4%, 0.1% and 0.3%, respectively. In terms of the energy space, the WTI front month continues to fall now trading $45.30.
In the FX market, the price action is really narrow except for Sterling with GBPUSD and EURGBP hitting 1.2641 and .8856 in early hours of trading (very close to our predicted target). JPY is the second weakest currency among the G10 since UK election exit polls, however, rest of the currencies are within very tight ranges.
Trending Economic 13/06
The UK inflation rate came in at 2.9% above the 2.7% expected and the core inflation was also above expectations; this may have a short-term positive impact on GBP but with so much uncertainty surrounding UK politics it will be difficult to see any meaningful rallies. Earlier, the Queen’s speech was delayed from Monday to Wednesday next week as Conservative and DUP struggle to come to a confidence and supply agreement. In our view risk sentiments will remain weak for GBP and upside will be limited before the Queen’s speech. Also, there is a growing opposition to Conservative and DUP alliance as it might derail relation between Northern Ireland and England.
The European equities have opened firm with FTSE, DAX and CAC 40 up 0.3%, 0.4% and 0.3%, respectively. USD has also been on the softer side with only exception being USDJPY which is the strongest G10 dollar pair. In the energy space, we have seen WTI front month consolidate above the $46.0 mark this week. This week CAD and NOK are now number one and two, respectively. For CAD, the sharp rise was largely due to a central bank hint on a rate hike; BoC Deputy Governor Carolyn Wilkins late on Monday highlighted strong growth and a need to reconsider current low rates.
From the Euro-area, we have the Zew sentiment index at 1000GMT. That said, the market is now focusing on a projected landslide victory for Macron in the French parliamentary election on Sunday and what it means for reforms in France.
FOMC Preview and the Dollar Outlook
The Fed rate hike on Wednesday is fully priced in and the investor will look for clues on balance sheet adjustment and future rate hikes. Currently, there is 50% probability of a Fed rate hike in December and expectations of a balance sheet reduction by next year; in our view this too conservative and we at least expect one full rate hike and a start in the balance sheet reduction this year. That said, the following things need to happen to push USD higher;
US CPI to improve.
Median dot plot unchanged or higher.
Discussion on balance sheet normalisation
No downward revision in long-term inflation
In terms of forecast, if Fed is hawkish on all four things we are likely to see a USD rally with 112.10 targeted on USDJPY and 98 targeted on USD- index.
Fed is neutral we may see some short-term weakness in USD with 109.00 targeted on USDJPY. Also, there is potential for a further upside for commodity currencies, primarily AUD as the investor will be assured that Fed will not move towards more hawkish surprise. We target .7650 on AUDUSD and 96.50 on USD-index.
A dovish Fed is likely to cause broad USD losses as we are likely to see the building of short-potions which were unwounded to a neutral level ahead of the FOMC. The USD-index is likely to break the key support around the 96.50 and USDJPY to test 108.15.
G10 Outlook - 14/06
GBP has been buoyant post positive UK CPI but Cable has now found resistance at 1.2800. That said, EURGBP sellers continue to move the pair lower with .8780 level also broken. The UK unemployment and average earnings at 0830 GMT now hold the key for short-term direction but we still see a rise in sterling as an opportunity to sell.
The main events for today remain the US CPI and FOMC. At present, there is 50% probability of a Fed rate hike in December and expectations of a balance sheet reduction by next year; in our view this too conservative and we at least expect one full rate hike and the start of the balance sheet reduction this year. That said, these things need to happen to push USD higher;
• US CPI to improve.
• Median dot plot unchanged or higher.
• Discussion on balance sheet normalisation
• No downward revision in long-term inflation
The European equities have opened mixed with FTSE down 0.1%, DAX up 0.3%. CAC 40 up 0.4%, and IBEX down 0.2%. USD has been weak with the only exception being USDJPY which is up 0.12%. In the energy space, the WTI front month is dipped below the $46.0 mark after consolidating above there for the past few days. That said the theme for this week is still risk-on with the commodity currencies outperforming safe haven currencies so far.
