What an eventful week it has turned out to be!! Especially for UK, as it went into deciding their next Prime Minister on 8 June 2017. What followed was wild swinging of fortunes between the Conservatives (led by Theresa May) and the Labours (led by Jeremy Corbyn). May won the elections but lost the majority. The effect was felt on GBPUSD (naturally, it had to) – collapsing 250 pips (2%) in five minutes, as soon as indications came in that the Conservatives will probably not get a majority. UK elections completely over-shadowed the other critical economic event, European Central Bank’s monetary policy announcement. Although they kept the interest rates unchanged, they cut their inflation forecast this year from 1.7% to 1.5%. The central bank raised its growth forecasts for the next year, saying it now expects GDP to rise by 1.9% this year, up from 1.8% expected back in March.
In my sense, two conclusions can be drawn from the above events:
1. Euro will probably remain stronger than Cable (GBP) – after May’s disappointing results, Britain will not get a hard bargain on BREXIT negotiations from Europe. The effect could remain for medium/long term. Buy EURGBP.
2. Do exit polls really work? At least three big global events have proved otherwise. BREXIT (when polls predicted BREMAIN by a thin margin), Trump’s win in US (Clinton was the polls favourite) and now the UK election results.
Market participants need to recognize that such events can lead to excessive market volatility which in turn could have a substantially adverse impact on their receivables/payables. It makes sense to remain adequately hedged ahead of such events.
Enough of gyaan. Let’s come to markets now.
Even though I’m bullish on EURUSD, technically, a short term correction could be seen. Check out the daily chart below. Euro had traded sideways between 1.04 – 1.08 for 5 months, before breaking beyond the 1.08 – 1.09 resistance. The French election results (23 Apr and 7 May) were the trigger and it surged higher towards 1.11 – 1.12. Macron’s election not only silenced French exit (from EU) supporters, it also comforted the markets that EU disintegration in more on peoples mind than in reality. Subsequently, the resistance around 1.1250 – 1.1290 held strongly. Technical indicators are looking overbought and there are visible divergences on Slow Stochastics and RSI. The reliable MACD has given a sell signal too.
My sense is that Euro could correct a bit, at least towards 1.09 – 1.10 before resuming the uptrend. If Euro breaks above 1.1320 and forms a fresh short term peak, then my assessment will be annulled and will tend to indicate that something else is conspiring.