As most of the event risk comes at the end of this week, with the UK election, a European Central Bank rate meeting and ex-FBI director James Comey testifying to US lawmakers about potential links to Russia and President Trump, it was perhaps not surprising that European markets had a rather underwhelming start to the week yesterday.
European stocks slipped back on fairly light volume, as well as some risk aversion after the events of the weekend in London, as gold prices hit a one-month high.
Oil prices decline
Oil prices also slipped back after Saudi Arabia and its allies cut off diplomatic and economic ties with Qatar, over its ties with Iran and other Islamist groups in the region. This appears to have raised concerns that this could cause the current OPEC deal to fracture, and while Middle East tensions are never a good thing, in the grand scheme of things a fracture seems unlikely given how small Qatar’s oil output per day actually is, at around 730k a day.
Positive day for sterling
The pound managed to have a fairly decent day yesterday despite another YouGov poll which suggested that the Conservatives could fall short of an absolute majority on Thursday, and a weaker-than-expected services PMI report for May.
It would appear that for now markets decided to place greater conviction on an ICM/Guardian poll, which gave the Conservatives an 11-point lead, along with the fact that despite a weaker-than-expected services report, the UK economy appears to be showing a significant improvement in the second quarter of this year. A growth upgrade from the World Bank may also have helped.
One of the more notable factors in this particular election has been how inconsistent the opinion polls have been, so much so that they have become akin to throwing darts at a dartboard, with a different number between 1 and 20 more or less every day. Ultimately they have been about as good as a glass eye on a frosty morning, and given the divergence between them, are becoming significantly much less useful. That being said, they still have the potential to move markets and are likely to continue to do so as we head towards Thursday.
The UK consumer has blown more cold than hot so far this year, largely due to the squeeze of higher prices, and slightly weaker demand, but we did see a strong Easter showing in April, with a strong rise of 5.6% in retail sales from the British Retail Consortium as consumers took advantage of some decent weather. This was always likely to fall back in the May numbers, with the latest retail sales coming in at -0.4%, with discretionary spending taking most of the strain. Food retail spending held up well, rising 3.2%.
EUR/USD – the November highs at 1.1300 remain within reach, with broader resistance at 1.1370. The current up move continues to remain stretched, which risks a pullback to 1.1170, and possibly even down as far as the 1.1020 area.
GBP/USD – managed to push slightly above last week’s high at 1.2921 yesterday, but is still in its wider range with support between the 50 day MA and the 1.2750 level, and 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 – slipped back from the 0.8770 area yesterday, and has managed thus far to hold above the support at the 0.8680 area. Does have the potential to extend to the 0.8800 area, but there is the prospect we could see a move down through 0.8680 towards the 200 day MA at 0.8600.
USD/JPY – while the US dollar stays above the 110.20 area the risk is for a move back to the 111.60 area. A break below this area, the 200 day MA, and May lows could well see a return to the April lows at 108.00
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.
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