Today’s report: Sterling Pounded on Surprise UK Election Outcome
All of the focus in early Friday trade is on the surprise UK election outcome. The Pound has come off as a result, though setbacks have been arguably contained considering the surprise and uncertainty that comes with it.
Wake-up call
Chart talk: Major markets technical overview video
- let down
- election surprise
- Yen offers
- intervention efforts
- Solid week
- Canada employment
- Macro players
- Investors comforted
- global distress
- USDSGDÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- What Went Wrong for Theresa May, G. Parker, Financial Times (June 9, 2017)
- When No Result is Better Than a Bad One?, L. Laurent, Bloomberg (June 8, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
The market is showing signs of short-term exhaustion after extending its 2017 run. But with the medium-term structure still quite bullish, any setbacks that we do see in the sessions ahead should ideally be well supported in favour of the next higher low and bullish continuation towards key resistance around 1.1365, which represents the August 2016 peak. Only a break back below 1.1110 would now take the immediate pressure off the topside.
EURUSD – fundamental overview
While the ECB did go ahead and remove some of its easing language on Thursday, the downgraded inflation forecasts and overall accommodative tone proved to be a let down for hawks, with the Euro pulling back as a result. Still, many believe the Euro remains an attractive buy on dips given what should be a move to policy reversal in the months ahead and given broader macro flow that is very much against the US Dollar right now on the back of scaled back Fed odds, US administration protectionism and controversy in the White House. German trade data won’t factor much today, with the market distracted by the surprising result in the UK election.
GBPUSD – technical overview
The latest round of setbacks are viewed as corrective with the market expected to be very well supported on dips into the 1.2500s in favour of a higher low and bullish continuation towards a measured move extension objective at 1.3500 in the weeks ahead. A breakout above critical resistance at 1.2775 back in April triggered a structural shift in the major pair warning of a longer-term base. Only a break back below 1.2360 would compromise this outlook.
GBPUSD – fundamental overview
The Pound has come under intense pressure as the UK election results come in early Friday. The market had been projecting a majority victory for the Conservatives and once again, UK voting caught the market off guard, with the PM failing to secure her majority government and inviting plenty of uncertainty in the sessions ahead as she scrambles to form a government. The initial Sterling decline is making sense considering the less stable outcome, though there is a case to be made for a stronger Pound if the outcome ends up resulting in a softer Brexit, something that would have been exceptionally Sterling supportive back in 2016.  UK industrial production and trade is out today but will be overshadowed by the election news.
USDJPY – technical overview
A recent recovery run off the 2017 low has stalled out, with the market sharply reversing course to the downside. This latest daily close back below 112.00 now exposes a possible retest of the yearly low at 108.13. In the interim, look for any rallies to be well capped ahead of 112.00, though only a break back above the recent high at 114.37 will negate the outlook and take the pressure off the downside.
USDJPY – fundamental overview
As is traditionally the case with this funding currency, most of the flow will be predicated on risk sentiment, with any deterioration fueling Yen demand and any increased risk appetite inspiring Yen declines. The major pair has been watching the results of the UK election and has been very well supported, with the market not too worried about the outcome as reflected by the push up in US equities back to fresh record highs.
EURCHF – technical overview
A recent break above 1.0900 has taken the short-term pressure off the downside and could be warning of a more significant structural shift. Next key resistance comes in at 1.1000, with the psychological barrier coinciding with a high from August 2016. The establishment above 1.1000 would force a meaningful shift in the structure and open the door for longer-term upside. At the same time, while the market holds below 1.1000 the overall trend is still bearish and a break back below 1.0800 would renew downside pressure.
EURCHF – fundamental overview
The combination of artificially supported, record high US equities and rising geopolitical tension should be a worry for the SNB as any capitulation on the equity front is likely to invite massive safe haven Franc demand the central bank will be unable to offset, irrespective of negative rate policy. For now, the SNB is hoping global sentiment will remain artificially elevated and the ECB will take on a more hawkish policy approach this Thursday, as per reports the central bank is preparing for a taper (Draghi has not confirmed). But the key focus for this market going forward will unquestionably be on the performance in US equities given the influence on broader sentiment. Any signs of intensification to the downside will likely invite a pickup in Franc demand and unwanted downside pressure on EURCHF.
AUDUSD – technical overview
An impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent break back below 0.7500 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7000 area in the days ahead. Ultimately, any moves to the topside are classified as corrective with a fresh lower top sought out and only a break back above 0.7611 to negate the outlook.
AUDUSD – fundamental overview
The Australian Dollar has been the strongest performer in the developed currency basket over the past week, with Aussie getting an additional boost from this week’s balanced RBA decision better than expected Australia GDP result and impressive China trade data. Thursday’s Aussie trade data and Friday’s Aussie home loans were disappointing, but with more of the focus on Australia’s trading partner, it isn’t a surprise to see the China data offset. Meanwhile, China CPI has just come out mostly in line and not really factoring. Looking ahead, Aussie will take its cues from broader macro flows, commodity prices and risk sentiment. Clearly there is a lot of volatility associated with the surprise UK election outcome.
USDCAD – technical overview
The uptrend in this market remains firmly intact, getting added confirmation following the May break to a fresh 2017 high, beyond a previous peak from December 2016 at 1.3600. A period of healthy correction has now ensued and the market will be trying to carve the next higher low, with any additional weakness likely to be limited in favour of a push towards the next measured move upside extension objective in the 1.4200 area. Ultimately, only back below 1.3224 would give reason for pause and delay the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar has enjoyed a nice run of late but has been showing signs of coming back under pressure, with a fresh round of Loonie offers building on the back of some mixed Canada GDP results in the previous week and another downturn in the price of OIL. Overall, the Loonie is going to be watching the price of OIL and developments out from the US on the political and economic fronts for additional cues. As far as today’s calendar goes, the primary focus will be on the Canada employment report and direction in the OIL market.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high, with outlook strengthened on a recent break to fresh 2017 lows. However, the recent break back above 0.7100 does take the immediate pressure off the downside, with scope for this corrective run to extend before the market rolls back over. But any upside from here should be well capped below 0.7300. A break back below 0.7035 strengthens this outlook and should accelerate declines.
NZDUSD – fundamental overview
New Zealand Dollar demand off recent 2017 lows has picked up, helped along by negative US Dollar sentiment in 2017, more stable commodities prices and an upbeat batch of recent Kiwi data including consumer confidence, GDT auction results, firmer producer prices and trade data. Meanwhile, local dairy giant Fonterra came out recently, announcing it was raising its milk price forecasts to give the currency another prop. But at the same time, with global equities continuing to look like they have run too far and with many out there worried about an intense wave of risk off flow ahead, these players are happy to sell Kiwi into rallies. Looking ahead, the economic calendar is exceptionally thin, and most of the focus will be on broader risk appetite and sentiment in the aftermath of the UK election.
US SPX 500 – technical overview
The market has been unable to break down below major support at 2320 thus far, leaving the pressure on the topside and the door open for that next big record push towards a measured move extension at 2480. However, if setbacks intensify and the market breaks down and closes below 2320, this will signal a shift in the structure and suggest a meaningful top is finally in place ahead of a more significant corrective decline.
US SPX 500 – fundamental overview
There has been a lot of talk about a potential top in the US equity market, with the rally pushing to record highs at an unnerving pace in the face of some disturbing fundamentals including exhausted (and reversing) Fed policy and rising geopolitical risk. And certainly this latest turmoil surrounding the US President has made things even more tense. But overall, the US equity market has done a good job proving it can easily buy back into any dip and keep pushing to record highs as it focuses on rates staying lower for longer and the Fed continuing to underdeliver on its forward guidance. The market was proven right once again last Friday after the US employment report proved to be a big disappointment. Stocks have also been supported into Friday after former FBI Comey testimony was not nearly as damaging to President Trump as initially thought.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016, putting in a series of higher lows and higher highs. This latest break to a fresh 2017 high confirms that next higher low in the 1215 area and opens an upside extension towards the 2016 peak at 1375 further up. At this point, only a break back below 1215 would compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Certainly the US Dollar back under pressure in 2017 is adding to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid, gold may continue to find bids on risk off macro implications.
Feature – technical overview
USDSGD has been trending lower in 2017, making a series of lower highs and lower lows. The most recent lower top has just been confirmed at 1.4130 following the break to a fresh 2017 low, with the drop now opening this latest move into the 1.3800 area. But the market is now capable of bouncing in the sessions ahead, as it tests formidable support in the form of a previous double bottom neckline and a 61.8% fib retracement off the 2016-2017 low to high move. Look for a push back above 1.3920 to strengthen the bullish outlook case.
Feature – fundamental overview
The Singapore Dollar has done a great job overlooking a soft run of data in recent days including non-oil domestic exports and disappointing GDP, with the emerging market currency rallying to a fresh 2017 high on the momentum from a wave of US Dollar selling in 2017. Meanwhile, China’s revamped fix methodology has been another source of additional Singapore Dollar demand.  But dealers have been talking about profit taking on Singapore Dollar longs, with the emerging market currency into major technical resistance (USDSGD support) and also not wanting to get ahead of itself after this latest run, especially considering a record push in global equities that could be at risk for reversal which would weigh on emerging market FX.