After a slow start to the week, traders are getting prepared for a rough ride in the currency markets. Although Comey’s testimony has attracted most of the media headlines, we didn’t see any significant disclosures from the prepared remarks released yesterday.
This explains the recovery in U.S. equities after a fall in the early hours of trading yesterday. While we cannot assume anything, a base case scenario would not be a big surprise to arise from Comey’s testimony before Congress. I think that the ECB meeting and the UK election are the risk events that will produce the big moves today.
The Euro has been trending significantly higher for the past three months, appreciating by more than 7% against the Dollar since early March. Although this reflects a sign of confidence in the Eurozone, it’s kind of problematic for the ECB who’s been fighting deflation for many years. Reports released yesterday citing unnamed official sources indicated that the Central Bank will lower the inflation forecast for the next three years.
The impact on the single currency was limited as the lower inflation projections were offset by higher growth expectations. It’s obvious we’ll not see any change in monetary policy today, and the key driver to the Euro will be the risk assessment on the economy. If the ECB amends its risk assessment to “neutral” from the current “downside”, EURUSD could easily break above 1.13 and move towards 1.15. If the ECB disappoints and Mario Draghi doesn’t reflect confidence in the economy’s recovery, the EURUSD may be headed for a sharp selloff.
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Sterling traders seemed to be pricing a May victory in today’s snap election. GBPUSD appreciated 0.4% yesterday as latest opinion polls indicated that a Tory majority is still on the cards. The higher the margin Conservatives win by, the more negotiation power May will have on Brexit terms, and the higher the Pound goes from here. I think that we can easily see a move in excess of 200 pips to the upside or the downside depending on the outcome and how much it deviates from current expectations.
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