UK Election and French Election Force Key GBP/USD, EUR/GBP Breaks
- News that UK Prime Minister called for a General Election on June 6 leveraged the third biggest GBP/USD move in 9 years
- Anxiety surrounding the Euro continues to climb as the first round of the French election floors EUR/USD risk reversals
- While the FTSE 100 and some Yen crosses have dropped, there remains little commitment to risk aversion
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This past session was all but prepared for a subtle review of the stubborn shifts in global risk trends, nuanced changes in rate expectations and fickle headlines relating to relationships between global superpowers. What we ended up seeing was far less reserved than that. There is little disputing the Pound's dominance for volatility Tuesday. The third largest Cable (GBP/USD) rally since the height of the financial crisis back in 2008 speaks to something wholly unexpected. The spark was the UK Prime Minister's unexpected call for a snap election on June 8th. While the initial response is plainly bullish, it would be presumptuous to claim the market's interpretation of this news. Perhaps this is viewed as a chance for a clear and strong mandate for the UK at the Brexit negotiation table or evidence that a 'hard Brexit' will be left off the table or perhaps misguided speculation that there will be an effort to reverse course on the divorce.
Without understanding the collective view of this event, it is difficult to call a trend or quick reversal. Furthermore, the news of the election generates considerable reaction through the sheer surprise it evokes, but follow through is just as difficult to maintain as it has been for Fed decisions, political promises/threats and risk trends at different times over the months. We should remember that when we consider the technical landscape for the Sterling crosses. GBP/USD easily cleared 1.5600 and went on to clear 1.2800. That puts it outside of a range that has been in place for six months. EUR/GBP broke a head-and-shoulders neckline around 0.8450. For the commodity currency-based crosses (GBP/AUD, GBP/CAD, GBP/NZD) aggressive breakouts look to be a strong charge in a long-term trend reversal. These are high profile and provocative moves, but the high threshold for follow through on such prominent developments remains.
In contrast, the Euro's development this week looks like it will continue to build to its crescendo rather than play out as a flash in the pan. The focus for the world's second most liquid currency is the first round French election which takes place on Sunday. While polls are swinging back towards the centrist candidates and away from firebrand Marine Le Pen, the same 'status quo' assumption was applied to the Brexit vote and the US Presidential election with market-moving results. Looking at EUR/USD volatility measures, traders seem not to be taking the risk this time around. Elsewhere, the big picture themes of risk trends, monetary policy and global trade tension are simmering but not boiling over. We discuss where activity meets opportunity in the markets in today's Trading Video.
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