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UK Election (June 8)
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ECB Meeting (June 8)
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FOMC Meeting (June 14)
This time next week we’ll all be putting a cross in a small box (again) to determine which direction the UK heads over the next five years. A surprise snap election called by PM May on expectations of a landslide victory has been anything but a victorious lap around the country. Let’s not forget this was May’s election to lose with the major opposition unfancied and in disarray. However, polls still generally predict a healthy majority for the Conservatives, which will then enable PM May to keep her more hardline Brexiteers quiet. This of course was the presumption when the snap election was called and propelled sterling 300 points higher on the day.
GBP has been stuck in a 200-point range, more or less, since then between 1.28 and 1.30. Any change to this consensus with a much smaller majority, would be pound negative as the uncertainty over the Brexit outlook would heighten. A potentially ‘harder’ Brexit could then take shape leading to the pound falling back to 1.25 initially. Certainly the appearance of a wounded and weaker leader would cast a big shadow over PM May’s new term.
On the same day as the UK election, we get an ECB meeting with updated staff forecasts for growth and inflation. The market believes the time is right for the ECB to drop any reference to downside risks as these have now eased with the plethora of positive economic data. The Council may therefore use the updated projections to justify their upgrade regarding the growth outlook. However, with the most recent Eurozone inflation figures disappointing, we think market participants will do well to heed Mario Draghi’s recent comments that the region still needs ‘an extraordinary amount of monetary support’. In which light, any dropping of the Bank’s easing bias will be premature.
The single currency has largely been consolidating its gains made after the French election which is a bullish sign as the longer-term uptrend is strong. A break above 1.13 has the potential to reach mid 2016 highs around 1.1430. That said, a soft ECB tapering already appears priced in and with EZ/US yield spreads stubbornly wide, we can’t rule out a drop back in prices to the 1.10 area if Draghi is cautious and changes are limited.
The virtual full pricing of another interest rate hike by the Fed this month means traders will be looking to see how far the Committee will look through the continued soft patch of economic figures. The Fed seems well set on its course of two more hikes this year (the market is currently giving this a 40% probability) but this may be curtailed if inflation stalls and we note the most recent US PCE data falling for a third straight month. Balance sheet discussion will also be important going forward, with the last minutes mentioning only ‘gradually scaling back reinvestments’.
The dollar is struggling to find any traction with 10 year yields near their November lows around 2.20%, down from their highs of 2.63% after the two previous hikes. This suggests softness in the dollar index will continue as we remain a little above six month lows. Obviously the monthly US employment data tomorrow will be critical but we shouldn’t discount political risk as eyes turn to a possible Senate appearance by former FBI Director James Comey later in the month.