Financial market research and analysis

The UK struggles with rising political uncertainties after Theresa May lost majority in June 8 snap general election. According to latest news, the PM’s office admitted that she hasn’t reach a deal to govern with a Northern Irish party last week (Bloomberg), but the Northern Irish unionists are still open to talks with May to give her support eventually (Reuters).

It looks like Theresa May is not ready to resign after her failed election gamble, yet the tensions are rising at the heart of the Conservative Party. Theresa May will face the committee of Conservative MPs today to discuss about the tragic election outcome and could well be brought to resign against her will.
According to the Telegraph, the former Chancellor Osborne said that May is a ‘dead woman walking’ and more importantly, that several MPs hint at a leadership coup by summer time. The truth is, her undesirable resistance in power could further damage the Tories’ image for the future elections, a situation which will certainly disturb many party members and pave Theresa May’s way toward the exit door sooner rather than later.

Meanwhile, the official Brexit talks should start this month and give the EU a stronger hand in negotiations. The hard- Brexiteers are now in a weaker position.

The GBPUSD started the week better bid on rising hope that May would now see a decent opposition to her hard-Brexit plans. But the downside risks prevail and prevent the pound from a meaningful recovery.

FTSE 100 started the day downbeat despite a softer pound, as investors fear a renewed thunderstorm due to a heavy political atmosphere in the wake of an awkward snap election.

Telecommunication (+0.60%) and energy (+0.45%) stocks diverge positively, yet the energy gains remain fragile as the WTI crude is giving back the earlier gains.
The Qatari crisis seems to ease, as the mediator Kuwait said that Qatar is ‘ready to understand’ its neighbours’ concerns and to collaborate for stability in the region. Nonetheless, the WTI crude remains in the negative trend below $46.90 (minor 23.6% retrace on May – June decline) and $47.87 (major 38.2% retrace).


Pound has a busy eco-political calendar

Besides the political turbulences, the pound is also heading into a busy week, with the inflation (Tue), the labour market data (Wed) and the Bank of England (BoE) meeting (Thu) on its agenda.

Solid inflation and earnings read could revive the BoE hawks despite the muddy political picture. How much support the BoE could give to the UK markets depends on the macro-metrics. In fact, the inflation is a major headache for Governor Mark Carney and could restrict the extent of his monetary support throughout the challenging Brexit period.

Resistance to a further GBPUSD recovery is eyed at 1.2824 (minor 23.6% retrace on March – June rise / post-election top). More offers are presumed pre-1.3000/1.3045 mid-term resistance.


Macron wins big at parliamentary elections

In France, the freshly elected President Emmanuel Macron won 33% of support in the first round of the Parliamentary vote, which will give Macron’s one-year-old party, Republic en Marche, 440 seats out of 577 in the lower house. The second round of the election is due on Sunday.

The EURUSD kicked-off on a positive note. The 1.1300 level is still the main challenge before the Federal Reserve’s (Fed) monetary policy meeting.


Mixed expectations into the Fed meeting

The FOMC meets on Tuesday-Wednesday and is expected to announce 25 basis points rise in Fed funds rate on Wednesday. The 25 basis points rate hike is fully priced in. Therefore, the Fed’s widely anticipated rate action may not give a further support the US dollar, as the Fed expectations shift gradually dovish beyond this week’s meeting.

The question is whether the Fed would carry on with the current rate normalisation pace, or hit the brakes temporarily.

Tensions between Trump and the FBI pushed the government spending plans and fiscal reforms to the sidelines, giving Fed time to remain seated on its hands after 75 basis points rise over the last six months. Under the current circumstances, the Fed’s next rate hike could be delayed to December and weigh on the US dollar.

Further details on the Fed’s balance sheet normalisation plans could be an upside risk to the recent weakness in the US dollar. Yet, the Fed will certainly opt for a gradual balance sheet normalisation, which should have a minor impact on the US monetary conditions and may not give a sustainable support to the Fed hawks.

The US 10-year yields recovered to 2.2180%.

The US equity futures started the week under pressure. The Dow Jones futures traded 32 points lower, as the NASDAQ 100 and S&P500 futures weakened by 4 and 32 points respectively.


Gold tests critical $1’265 support

Gold retreated to $1’265 (major 38.2% retrace on May- June rise) on improved US yields. The latest sell-off in the yellow metal could offer interesting dip-buying opportunities for the USD-bears this week, with the topside target set at $1’295/1’300.

On the downside, breaking below $1’265 should signal a short-term bearish reversal and encourage a further slide to $1’260 (50-day moving average), 1’255 (50% retracement), $1’245 (major 61.8% retrace & 100-day moving average).


Japanese yen ranged before Fed – BoJ outcome

The USDJPY traded in the tight range of 110.16-110.44 in Tokyo; Nikkei (-0.52%) and Topix (-0.01%) were mixed as Japanese producer prices remained unchanged in April, versus 0.1% month-on-month rise expected by analysts. Machine orders unexpectedly retreated by 3.1% on month to April.

The Bank of Japan (BoJ) meets on Friday and is expected to maintain the status quo.