Sterling was catapulted to a fresh six-month high above 1.2900 during trading on Tuesday, as speculation heightened over the surprising snap general elections that are being used as a measure to reduce the risk of failure in the intricate Brexit negotiations. The likely possibility of Prime Minister Theresa May strengthening her party’s majority as a result of the general elections on 8 June has alleviated some hard Brexit fears, with markets now pricing in a softer Brexit ending. Although this fresh development was successful in reviving Sterling bulls, the sharp price rebound felt excessive with Pound sensitivity possibly playing a key part.
Questions should be raised over the sustainability of the current Sterling rally, especially when considering how political uncertainties and Brexit woes remain current. Investors are still pondering over the economic future of the United Kingdom after Brexit, with questions still being raised about whether the two-year timeframe will be enough to secure a deal. Although the European Union has stated that they will not punish Britain during negotiations, the thought of the EU making an example out of Britain to prevent others from leaving the bloc does linger in the background.
While the technical outlook on the daily charts is undeniably bullish, the bearish Brexit fundamentals can attack at any given moment. The decisive breakout and daily close above 1.2775 could encourage a further incline higher towards 1.3000. In an alternative scenario, weakness below 1.2775 may open a path back towards 1.2600.
Euro and the French Presidential elections
The euro/U.S dollar (EUR/USD) currency pair lurched towards 1.0735 on Tuesday, which had nothing to do with a change of bias towards the Euro, but was more about persistent Dollar weakness. Political risk remains a dominant theme in Europe, with anxiety set to heighten ahead of the first round of the French Presidential elections on 23 April. With the current polls displaying a fierce battle between four leading candidates, concerns have started to mount over the possibility of Marine Le Pen and Jean-Luc Mélenchon making it into the second round. Although Macron and Fillon were labeled as the favorites to win the election if they faced Marine Le Pen in the second round, polls have been incorrect in the past and could be proven wrong again, with the Brexit shocker and Trump’s presidential victory acting as prime examples.
From a technical standpoint, the fact that the sharp rebound on the EUR/USD elevated prices above the previous 1.0685 lower high could support bulls in the short term. A breakout above 1.0750 may open a path higher towards 1.0820. This short term bullish setup remains valid above 1.0685.
Stock markets gripped by uncertainty
The horrible amalgamation of geopolitical tensions, political risks, ongoing uncertainty and fading optimism over Trump moving forward with his fiscal spending plans have soured risk appetite this week. Asian shares were mostly lower during early trading on Wednesday, with the bearish domino effect obstructing gains in Europe. The financial market concluded Tuesday in the red territory, which could roll over this afternoon as the visible deflation of the reflation trade compounds to the downside pressures.
Commodity spotlight – WTI Crude
WTI Crude descended lower on Tuesday, with prices stabilizing above $52 after U.S crude stockpiles fell less than anticipated. The government reports of U.S Shale ramping up output sharply in May fueled the selloff, as bears exploited the concerns over excessive supply in the global markets. Oils oversupply woes may remain a critical theme which limits how far prices appreciate in the medium to longer-term. From a technical standpoint, although WTI Crude is bullish on the daily charts, bears have an opportunity to pull prices lower if the $52 support is breached.