Euro And Pound On The Back Foot Before UK Election, RBA Cut By-Passed

Count down to UK General Election

With two days to before the UK’s general election, the political uncertainties anchor the GBP-complex on the downside. The sell-off in Gilts pushes the entire UK sovereign curve upwards; the 2-Year sovereign yield advance to 0.56%, the 10-Year yield hits 1.90%.

As traders gradually cut their long positions, the downside pressures on GBP should continue rising. The UK’s idiosyncratic risks should comfortably offset the erratic USD sentiment before Friday’s NFP release. A post-election rally is envisaged by the end of the week.

We see opportunity in selling the rallies in GBP-complex. The upside attempts in Cable are seen limited at 1.5185/1.5245 area for a bounce back to 1.5100 support (Fibonacci 50% projection from Apr 13-17 on Apr 21). EUR/GBP remains capped below 0.7490/0.7510 (pivot / Fibonacci 50% on Dec’14 – Mar’15 drop) while decent vanilla calls are supportive at 0.73/75, 0.74/15 for today’s expiry.

What is the upside potential in FTSE?

Almost all FTSE sectors trade higher in London, the energy stocks gain more than 1% as the WTI brushes against the $60 resistance. Despite a push above 7000 this morning, the appetite for UK equities is expected to wane before May 7 election. The upside attempt in FTSE 100 is seen limited at 7040/7060 for a maximum advance to 7100. For the week following the election however, the market is reinforcing the upside hedge: May 15 calls with 7000/7100 strike cost 21% and 14% more expansive today, while 6850/6500 puts are 36% to 50% cheaper. The market is preparing for a rally after a pre-election pause.

EUR retreats on Brexit fears, Greek talks

Almost a figure drop pulled EUR/USD below the 1.1130/10-pivot in the European open and will certainly mark the end of the recent short-term appetite in favour of the single currency. The upcoming UK elections and fears of a ‘Brexit’ inject negative bias in the EUR-complex. Combined to endless discussions on Greek solvability, there is little reason to take a downside risk now that the momentum has significantly lost strength. After a prosper week of recovery, it is time for EUR/USD to take a breather. The short-term EUR/USD sentiment turns neutral from positive, paving the way to 1.1050 before a potential extension to 1.0901 (Fibonacci 61.8% and 38.2% on Apr 21 – May 1st rally).

RBA rate cut has been by-passed

As expected, the RBA cut its cash rate target by an additional 25 basis points to the fresh historical low of 2%. This is the second time since December that the RBA lowers rate to fight the sinking commodity prices and slowing Chinese growth. AUD/USD spiked down to 0.7788 at the time of decision, yet there has been no follow through after the knee-jerk drop. Despite lower AUD rates, the rate differential with USD, EUR and JPY remains carry-supportive for the Aussie. The oscillations around the 80 cents area are seen likely with the market expecting that the easing cycle has certainly hit the bottom.