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ECB and Comey testimony in focus as UK goes to the polls

This week has seen European equity markets drift off, crude oil prices tumble and gold prices hit six-week highs, as investors adopt a safety-first position ahead of today's UK election vote, ECB rate meeting and the testimony of ex-FBI Director James Comey to the Senate Intelligence Oversight Committee.

This testimony is expected to shed some light on some of the conversations that were had between him and President Trump, as well as give clues as to his dismissal.

In written answers released yesterday, there weren’t any significant revelations that weren’t already in the public domain. The testimony did confirm the president himself was not under investigation at the time and that Trump did ask Comey to drop the Flynn investigation. This lack of a “smoking gun” managed to pull US markets off their lows and close higher. Even so, while there was nothing in the written answers, that doesn’t mean that something won’t come out when Comey is questioned later today.

UK election polling begins

We begin with the start of polling in today's UK general election vote and the end of a fairly surprising campaign, that was on the face of it a much closer race than had originally anticipated. From an uninspiring Conservative party campaign to a Labour one which went better than expected, the pound has held up well in anticipation that a Labour victory is still thought unlikely.

In the face of a weakening US dollar, the euro has gone pretty much one way since the beginning of the year, up 7% against the greenback. In the face of an improving economic environment speculation has inevitably grown that the European Central Bank (ECB) could well be forced to consider reining back its very easy monetary policy.

At its March meeting the ECB nudged up its growth and inflation forecasts in expectations of an improvement in the economic outlook and recent data appears to suggest this positive tone is likely to continue. This rise in the euro presents a problem for the ECB as it puts downward pressure on their inflation outlook, and in the face of a US dollar that has more or less given up on President Trump’s reflation plans, the message the ECB sends later today needs to try and keep a lid on further euro gains, as well as yields.

Yesterday's reports that the ECB may well downgrade their inflation forecasts for today’s policy meeting appear to be an attempt to send a message to the markets that while economic activity remains positive, any move to ease back on monetary policy remains some way off. This assessment will no doubt not be well received by those more hawkish members of the ECB governing council, who complain that the negative interest-rate environment is hurting northern European savers and that the ECB should be preparing the ground now.

It is likely that President Draghi will have to revise his assessment of the eurozone economy, removing the references about economic risks being tilted to the downside. To not do so would stretch his credibility, though he will no doubt continue to claim the credit, in an almost John Terry like fashion, for the fact that the strength of the recovery in Europe is all down to the ECB’s flexible and negative interest-rate monetary policy, as opposed to the slide in significant slide in energy prices, which probably delivered a much more significant demand boost.

This slide in energy prices, as well as continued weakness is likely to offer the ECB a way out in terms of trying to keep a lid on the euro in the form of a lowering in inflation expectations, which if confirmed could well see the euro slip back towards the 1.1000 area, if he chooses to be particularly dovish.

As if to emphasis the weaker inflation outlook, crude oil prices tumbled yesterday to a five-week low, after weekly inventories showed a surprise build of over 3m barrels against an expectation of a 3m draw, increasing concerns that, despite the continued caps to output, the current inventory overhang is likely to take much longer to work off. The build in oil and gasoline inventories was all the more surprising given that US driving season is now well under way, usually a time of peak demand.

Forex snapshot

EUR/USD – the November highs at 1.1300 are still within reach, with broader resistance at 1.1370. The current up move continues to look stretched, which risks a pullback to 1.1170, and possibly even down as far as the 1.1020 area.

GBP/USD – the pound continues to find buyers on dips, well supported below 1.2880, as it looks to return to the highs near 1.3040. Still stuck in the broader range with support between the 50 day MA and the 1.2750 level, and resistance near the recent highs at 1.3040. We need to see a consolidated move through 1.3050 which has the potential to target the 1.3320 area. Only a move below 1.2750 argues potentially back towards the 1.2600 area.

EUR/GBP – continues to find support at the 0.8680 area and while above here the risk remains for a look at the 0.8800 area. A break below the 0.8680 area targets a return to the 200 day MA at 0.8600.

USD/JPY – the break below the 200 day MA and the 110.20 level has opened up the downside and the April lows at 108.00. Has found a degree of support near 109.00 but we need a break back above the 110.30 level to stabilise and reopen a move back to 111.60.


Heightened market volatility is likely over the election period, which could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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