Financial markets revealed subtle signs of stability on Thursday as investors remained on standby ahead of an array of high-risk political and macroeconomic events that could spark extreme volatility. Asian shares were flat while European equities inched higher before the pending European Central Bank meeting. With caution still lingering in the air as traders brace for former FBI Director James Comey’s testimony, it will be interesting to see how the financial market responds this afternoon.
While the ECB meeting and Comey’s testimony could create shockwaves across the board, I feel that today’s main event remains the UK General Election results which are likely to leave Sterling explosively volatile.
Euro lower ahead of ECB meeting
The euro/U.S. dollar (EUR/USD) currency pair was under pressure on Thursday as a bout of profit-taking took place ahead of the forthcoming European Central Bank meeting. With markets widely expecting the ECB to leave monetary policy unchanged in June, Mario Draghi should seize the spotlight with investors heavily scrutinizing the tone he adopts at the press conference. Although the encouraging macro-fundamentals from the European economy has supported the euro and even spurred speculation of the ECB tapering in the future, inflation still remains below the 2% target.
With expectations already mounting over the central bank cutting inflation targets amid a drop in energy prices, the euro could find itself under renewed selling pressure if Draghi dishes out a dovish undertone. While an unexpected hawkish surprise from the Central Bank has the ability to propel the EUR/USD above 1.1300, a guest appearance by doves should pave a path back towards 1.1100.
Comey’s testimony in focus
The Greenback edged higher on Thursday and this has nothing to do with a change of bias towards the currency, but short-term bulls exploiting the technical bounce. With political uncertainty in the U.S. and soft economic data weighing heavily on the U.S Dollar, the outlook remains tilted to the downside.
Dollar sensitivity and price volatility are likely to intensify ahead of the testimony of former FBI Director James Comey on Thursday where investors will be paying very close attention to whether anything new is brought to the table. With investors still questioning whether U.S. President Donald Trump committed an impeachable offense by sharing classified information with Russia and attempting to interfere with U.S.-Russia relations, this testimony could be one for the books.
Sterling pressured ahead of UK election exit poll
The Sterling was gripped by pre-election jitters on Thursday with prices dipping below 1.2950 as investors pondered over how the UK election exit poll results may play out this evening. Although the final general election poll has offered the Conservatives a last-minute boost against Labour, the election outcome remains uncertain. With the uncertainty ahead of the general election leaving investors on edge, Sterling could remain under pressure with short-term bears targeting 1.2900.
A situation where no party wins the majority could expose Sterling to extreme downside risks with prices sinking towards 1.2600 as the first target.
Commodity spotlight – WTI
Oil prices were sold off aggressively on Thursday after an unexpected increase in U.S. crude oil inventories fuelled oversupply concerns. With the oversupply woes still a dominant theme in the oil markets and OPEC’s valiant efforts to stabilize the markets disrupted by U.S. shale production, WTI Crude may receive further punishment. From a technical standpoint, WTI crude is heavily bearish on the daily charts. A breakdown below $45.00 should open a path lower towards $44.00.