Pound Jumps As Snap U.K. Election Seen Strengthening Brexit Negotiations, French Elections In Focus, ASX Futures -38

The British Pound surged +2.19% against the U.S. dollar and +1.36% against the Euro shown on the first chart below as U.K. Prime Minister Theresa May called a snap election for June 8th. The general consensus is that this will strengthen the PM’s bargain position in Brexit negotiations as the next election was due to be held in early 2020 shortly after the conclusion of Brexit negotiations. Potentially adding to the size of the Pound’s gain is the breakout of the technical resistance level at +1.2615. Given the Pound has remained within a well-defined trading range, it is likely a large number of stop orders had been placed just outside these levels exacerbating the buying.

Currently polls suggest the Tories hold a 20 point lead over Labour and gives the PM breathing room with another election not held for five more years. The stronger currency weighed on U.K. equities with both the FTSE100 & FTSE250 down -2.46% & -1.16% respectively with the FTSE100 hit harder given the constituents exposure to overseas earnings. 

The spread between one and two month implied volatility in the Euro against the dollar rose to the highest levels since the GFC with the first round of French elections to be held on Sunday followed by the second round voting on May 7th. Despite confidence in Independent Emmanuel Macron’s ability to defeat other candidates in the second round, polls have suggested that the race has tightened considerably in the past few weeks raising the possibility he may not even reach the second round. CAC40 dropped -1.59% overnight, as did the Euro Stoxx 600 declining -1.11% along with the DAX30 down -0.90%.

While the French President holds a very important role, so does the legislative and judicial branch similar to the U.S. meaning there are checks and balances in place and that a victory by a candidate with a less favourable view on the Euro does not automatically translate into a worst case scenario such as France exiting the EU. 

Safe-havens continued to be in demand, with the Yen rising +0.45%, as did the Swiss Franc up +0.81% and spot gold gained +0.39%. Both the two & ten-year U.S. treasury yields dropped -3.6 & -8 basis points respectively pushing the U.S. dollar index down by -0.77%. That weighed on U.S. equity indices with both the S&P500 & Nasdaq100 down -0.29% & -0.14% respectively. Defensive sectors continued to outperform led by consumer non-cyclicals (+0.28%) and Telecommunications (+0.23%) while energy (-0.87%) and financials (-0.62%) were among the biggest decliners.  

Locally the ASX200 finished -0.90% lower and we look set to start trading on a weaker note with ASX SPI200 futures down -38 points in overnight trading.If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account. 

Data releases:

•         Australian Westpac Leading Index (MoM Mar) 10:30am AEDT

•         Euro-zone Trade Balance (MoM Mar) 7:00pm AEDT

•         Euro-zone CPI (MoM & YoY Mar) 7:00pm AEDT

•         U.S. Crude Oil Inventories (Apr 14th) 12:30am AEDT


Chart 1 – GBP/USD (Blue) & EUR/GBP (Purple)

 

Chart 2 – Euro Imp. Vol. 1 Month – 2 Month Spread

 

Source: Rivkin, RivkinTrader

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via james.woods@rivkin.com.au or by phoning +612 8302 3631.

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