By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
So far it seems that Super Thursday is turning out to be a major disappointment. EUR/USD traded in a 55-pip range following the European Central Bank’s monetary policy announcement and an even narrower one if you count from the start of ECB President Draghi’s press conference. Former FBI Director Comey’s testimony also failed to inspire big moves in the dollar although it reinforced the greenback’s positive bias – more on that later as there’s one more event risk to discuss that could spark a strong move in currencies – the U.K. election. We are going to print before the polls close since we have media engagements but at 5pm NY time/21 GMT, the initial results will be released. The election won’t be called until a few hours later (unless there is a hung parliament) but GBP/USD almost always reacts strongly to the initial exit polls.
We took some time to investigate how GBP/USD traded after the last 5 elections and there were 2 main takeaways. First, don’t chase the initial move because it can be very strong and there’s almost always a 50-60-pip retrace, so wait to buy/sell on a 50-pip pullback. Secondly, whatever move that happens Thursday night or on Friday morning, you can expect follow through, so wait for prices to settle and take a continuation trade during the NY session.
This election is important because it will determine whether Britain has a messy, soft exit from the E.U. or a smooth, hard exit. But in recent weeks, it has also become a vote on security. Voters have been wondering whether the Tories have been doing a good enough job to prevent terrorism in the U.K. The Conservatives need to win with a comfortable majority. Ideally, that's 30-plus seats but anything above 10 is good enough for GBP/USD to test 1.30. Anything less than that and there we'll see a knee-jerk decline. If they lose seats, that will be a major problem and the more they lose, the stronger the decline in GBP/USD. There’s no doubt that however much GBP/USD falls, if the Tories lose, it would be greater than if they won. If the Conservatives win with a strong majority, it will be wildly positive for GBP. Even though PM May stumbled into election day, it will take a loss of 8 seats or more for the Conservatives to lose their majority and for her job to be at risk. The Conservatives should come through with at least a small majority (maybe even better) at which point May would say a win is a win, giving her the mandate for Brexit talks. So unless the Tories lose seats, the damage to GBP/USD will be minimal, although a small victory will still lead to a knee-jerk decline in GBP.
Both the ECB meeting and Comey’s testimony were anticlimactic. While the European Central bank upgraded its GDP forecasts, altered its risk assessment and dropped the word “lower rates” from its forward guidance, the euro did not rise. Instead, the currency fell back down to 1.12 as investors interpreted Draghi’s emphasis on low inflation as a sign that tapering will not begin in September. At the same time, the dollar rallied after Comney’s testimony, keeping EUR/USD under pressure. That said, Eurozone data continues to look solid with first-quarter GDP growth revised up to 0.6% from 0.5%. For that reason, we think it's only a matter of time before EUR/USD recovers. EUR/JPY and EUR/CAD could be more interesting than EUR/USD for a short-term trade as USD/JPY looks destined for 110.50 and USD/CAD could benefit from softer labor data.
The main takeaway from former FBI Director James Comey’s speech on Thursday was that President Trump did not officially do anything to warrant an impeachment, which can be viewed as positive for the U.S. dollar because it doesn’t add any more uncertainty. The greenback traded well throughout the North American session thanks to a rise in U.S. yields and moved slightly higher after Comey’s testimony. We can see USD/JPY extending its gains to 110.50, but we don’t expect much more beyond that ahead of next week’s FOMC rate decision.
Aside from the GBP, the Canadian dollar is also in focus over the next 24 hours with Canada’s labor-market report scheduled for release. USD/CAD is knocking on 1.35's door and loonie traders may be waiting for the employment report before taking the pair well above this level. Recent Canadian data has been disappointing including the sharp drop in the IVEY PMI and its employment subcomponent, which point to a softer labor-market report. Oil inventories also increased unexpectedly, driving crude oil and the loonie lower. However gains in CAD on Thursday were restrained by comments from BoC Governor Poloz who expressed confidence in the economy. He said he is comforted by better dynamics and sees early signs of business-investment recovery. If USD/CAD rises above 1.3530, we should see a swift rally to 1.3600, but that would require softer labor data. Meanwhile, the Australian and New Zealand dollars moved in opposite directions with the former falling on a much weaker-than-expected trade surplus. Further losses were prevented by a stronger pickup in Chinese imports. The New Zealand dollar hit a fresh 3-month high with no specific news behind the flow.