The Day So Far…

‘The calm after the storm’ has been the theme of the morning as market participants take stock on the news of the snap election announced by UK Prime Minister Theresa May. For me the break of a key level in Cable just above the 1.2800 handle last night changes the game in the short-term and technically that level looks good as support for a potential extension of this recent move higher in the coming days. This of course comes in the context of the US intentionally weakening their currency (as much as they deny this) in order to stay competitive in the global trade arena, while US 2-yr break even’s continue to decline reflecting a tailing off of inflation fears as an impending Trump fiscal stimulus package looks increasingly unlikely to happen any time soon.

Cable break 12806

To me, timing is what good politicians do best, and despite the media furore that May has made a severe U-turn on her view on holding a public vote, the move only has upside for her in the near-term. For one, she provides a democratic solution to the fact that she is in essence a non-elected leader of the nation, so this will only further cement the public opinion that she is a respected leader and as such is fulfilling the wish of the people on balance. Secondly, May knows full well that now is an opportune time to strike right at the heart of Labour and potential capture as much as a 130-seat majority in parliament when interpreting the highly respected Electoral Calculus prediction. In fact as of today the Conservatives hold a 20+ point lead over the Labour Party which compares to just 3 at the time of the EU referendum last summer.

Current poll April 2017

If the polls are proved correct on June 8th then this would give the PM a clear mandate and a much stronger hand in entering negotiations with Europe over Brexit terms, a move that in essence provides a smoother and more orderly process to the discussion, which in combination with a large number of shorts getting squeezed, may further explain the positive reaction seen in the GBP yesterday, and why in the short-term I believe Cable will see further upside in the days/weeks ahead. The other supporting factor of this view is the French election which at this point is still an unknown in terms of who will qualify for the 2nd round run-off. In the scenario that Melenchon surprises and goes through against Le Pen the knee jerk reaction will be a sharp move lower in the EUR given their anti-EU stances which would make GBP long all the move appealing in the short-term.

The Day Ahead

A quiet US calendar to come with oil inventories only likely to provide a momentary distraction to the broader macro themes at play. Fed’s Beige book will likely be a non-event as per usual, and the vote in the Commons on the actioning of the UK election is said to be shortly after PMQ’s today which commence at midday. My overall advice today would be to not get to aggressive given the size of movements seen on Tuesday and to look for more conservative entries as the market regathers its composure.

 

Anthony Cheung
Anthony is a leading market commentator with a decade of experience accumulated as Head of Market Analysis at a leading news and analysis organisation, and now Senior Associate of Amplify Trading.