Talking Points:
- Draghi did Draghi, stays dovish and eases fears of premature easing, lowers inflation view
- GBP & Gilts fell in anticipation of a narrow Tory victory
- Sentiment Highlight: FTSE longs jump ~75% to try and grab post-election pop
EUR/USD fell to monthly lows on a drop in inflation forecasts due to a global phenomenon, weak energy prices. However, the weakness in the EUR appears short-lived, and a look at the chart of EUR/USD still shows a positive price structure above 1.11. Draghi encouraged patience as the world awaits whether or not the ECB will hit their 2% mandated inflation target. However, the ECB did lift their economic growth forecasts, albeit by a mild 10pbs. This small lift in growth forecasts did enough to quiet fears of further rate cuts down the road. The combination of lower inflation, but higher growth could provide a backdrop for risk to remain supported and volatility to remain low depending on the outcome of the UK election.
The Jim Comey testimony passed with little fanfare or implications that should add to the risk-premium in the US. Thursday’s Senate testimony did help markets take a sigh of relief as Comey said he declined to say as it was not his place to say whether or not he felt that the President attempted to obstruct justice. On the other hand, this means the issue will likely not be put to rest soon, which puts the focus on the UK election.
Would you like to know what our top minds are watching over the long-term in markets?
As with most elections, it is doubtful that a firm conclusion will be reached before the close of NY trading at 17:00 EST. We continue to see a fall in 3-month implied volatility, which would most likely only change course should there be a surprise Corbyn victory for the Labour party. It is worth noting that the short-term effect on the announcement of the election is likely to be the market’s perceived view of the GBP for the long-term. A short-term bounce in cable is most likely on a Tory victory given that’s what the market has priced in, but long-term, markets still fear the tough stance that honor’s the Tory view (God, King, Country) could have on effective Brexit negotiations. On the other hand, a Corbyn-led Labour victory (seen as unlikely by the polls) is likely to provide a more unified EU-UK negotiation going forward. There remains fears about Brexit’s impact on the economy going forward and Labour is perceived to help mend the ways that the EU referendum outcome to leave have confounded investors with exposure to London.
A clear market point that investors have been watching are the spreads between US Treasury yields and UK Gilt yields at the 10-year benchmark. Recently the spread (an indication of credit quality) between the two sovereigns have risen to a near record high as US yield premium over the UK is near the most extreme level that was recorded in June 2000. The technical point of concern on the chart that would likely cause aggressive selling would be a break below the May low of 1.2764 in GBP/USD.
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Closing Bell’s Top Chart: June 08, 2017, German 10Y Bund yields testing LT support (200-DM/ Trendline)
Tomorrow's Main Event: CNY Consumer Price Index (YoY) (MAY)
IG Client Sentiment Highlight: FTSE 100 contrarian signal favors reversal lower per gain in net-longs
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
FTSE 100: Retail trader data shows 29.3% of traders are net-long with the ratio of traders short to long at 2.42 to 1. In fact, traders have remained net-short since Apr 24 when FTSE 100 traded near 7126.6; price has moved 4.5% higher since then. The number of traders net-long is 61.0% higher than yesterday and 83.0% higher from last week, while the number of traders net-short is 19.7% lower than yesterday and 23.7% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests FTSE 100 prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current FTSE 100 price trend may soon reverse lower despite the fact traders remain net-short. (Emphasis mine)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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