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Draghi’s rhetoric could cause sands to shift

Draghi’s rhetoric could cause sands to shift

GBP
GBPUSD has been largely restricted to a narrow trading range between 1.2770-1.2860 for the last week as investors have tried to gauge the impact of May’s victory in the June elections on Brexit negotiations. The polls released yesterday showed Conservatives maintaining a healthy lead with 49% support.

The market is already pricing in a May win as a sure thing and is implying it will improve her negotiating stance within Europe. As a result, Sterling remains well bid, although it must be noted that the spike seen on April 19 was largely due to the unwinding of the GBP short positions. This morning, the GBPUSD pair clocked a 9-day high hitting the 1.2900 level as Trump’s tax plan failed to impress the USD bulls.

The GBPEUR cross also traded with a positive bias for the second consecutive session and extended the previous session’s reversal move from over two-week highs. A fresh bout of buying interest surrounding the British Pound, against the backdrop of optimism led by the UK PM Theresa May’s announcement to call for a snap election on June 8th, has been a key factor in pushing the rate higher up to the 1.1800 level.

USD

Yesterday, US Treasury Secretary Steven Mnuchin outlined Trump’s tax reform plans and the market was not convinced that the tax cuts would “pay for themselves in growth, reduction in deduction and closing loopholes” as indicated by Mnuchin. Trump’s goal is to lower the corporate tax rate to 15% from 35% and reduce individual income tax brackets to 3 from 7 with the highest tax rate at 35%. It is worth noting that the plan was short on detail and almost identical to the one announced last Autumn.

According to Paul Ryan, Congress is getting closer to healthcare reform, an essential element of tax reform, but avoiding a government shutdown is the number one priority. If lawmakers finalise a deal that would keep the government running through September it would be more favourable for the U.S. Dollar, but a stop-gap one-week government funding bill seems the most likely scenario.

EUR

Although there had been reports of a potential European Central Bank (ECB) policy adjustment in June, markets expect a generally dovish stance at today’s policy meeting with Mario Draghi, determined to keep any expectations of policy changes in check. If the ECB talks about a QE taper, the EURUSD will spike, leading to another wave of broad based USD selling and consequently a GBPUSD rally.

Data to Watch:
7:00am GER EUR Gfk Consumer Confidence Survey (May). 10:00am EUR Services Sentiment (Apr), Consumer Confidence (Apr), Industrial Confidence (Apr), Business Confidence (Apr), Economic Sentiment Indicator (Apr). 12:45pm EUR ECB Interest Rates Decision, ECB Deposit Rate Decision. 1:00pm GER EUR Consumer Price Index (YoY) (Apr), CPI (MoM) (Apr), Harmonised Index of Consumer Prices (YoY) (Apr), HIoCP (MoM) (Apr). 1:30pm USD Initial Jobless Claims (Apr 21), Durable Goods Order (Mar), DGO ex Transportation (Mar). 1:30pm EUR ECB Monetary Policy Statement and Press Conference. 3:00pm USD Pending Home Sales (YoY) (Mar), PHS (MoM) (Mar).

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