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by Charalambos Pissouros

GBP Among the Main Losers, EUR’s Election Boost Stays Short-Lived

The pound traded lower against most of the other G10 currencies yesterday. With no top-tier UK data scheduled for this week, GBP-traders are likely to keep their gaze locked on the political landscape, and especially on who could be the next Prime Minister. The euro gapped up on Monday after the results of the EU elections showed that pro-EU parties retained majority in Parliament. That said, the common currency came under selling interest during the day, following reports that the EU Commission could propose a disciplinary procedure against Italy next week.

May to Step Down, Who’s next?

The pound traded lower against all but one of the other G10 currencies on Monday and during the Asian morning Tuesday. It underperformed the most against CAD, USD and JPY in that order, while the currency which failed to eke out any gains against GBP was SEK.

GBP performance G10 currencies

On Friday, the pound traded higher after UK PM Theresa May announced her resignation, and continued to do so during the early trading Monday. Remember that on Thursday, we noted that the British currency could rebound when May announces she is stepping down. But we also said, that this could be “a dead-cat bound”, a “buy the fact” reaction before the next leg down. Indeed, even though there were no major events or headlines coming out from the UK yesterday, the pound turned south again to be found among the main losers today.

With no top-tier UK data during the rest of the week either, GBP-traders are likely to keep their gaze locked on the political landscape, and especially on who could be the UK’s next Prime Minister. According to media reports, most of May’s potential replacements are hardline Brexiteers, prepared to leave the EU without a deal if needed. With the front-runner being Boris Johnson, the probability for a no-deal Brexit in the end of October remains decent in our view, and thus, the pound could resume its prevailing downtrend.

Any new PM will still have to solve the riddle May was not able to. He or she will have to present to Parliament a deal that could win majority, but in order to do so, the EU may have to soften its stance and return to the negotiating table, something the Union remains unwilling to do. Thus, taking the EU’s stance as a given, as we get closer to the October 31st deadline, the risk of a disorderly exit could continue growing, especially with a hardliner in charge of the process, unless UK lawmakers decide to unlock a second referendum. However, even in such a case, there is no guarantee that people will vote to stay. Bearing in mind the support towards Nigel Farage’s Brexit Party in the EU Parliamentary elections, the result may once again be “Leave”. Something like that will bring MPs back to square one, but with less time to figure out a solution.

GBP/NZD – Technical Outlook

After hitting the psychological 2.0000 mark in the beginning of May, GBP/NZD reversed by 180 degrees and started drifting lower. This led to a break of the medium-term upwards moving trendline taken from the low of December 12th. At the same time, the rate continues to trade below its short-term tentative downside line drawn from the high of May 8th. Currently, the pair is balancing slightly below its key support area at 1.9350, which may be seen as another sign of weakness. For now, we will remain somewhat bearish and continue aiming towards lower levels.

A further push lower, away from the 1.9350 hurdle, could make the bears feel a bit more comfortable and allow them to drive the pair to the 1.9260 zone, which is the low of April 16th. Given that at that point, GBP/NZD could be already quite oversold on the shorter timeframes, we may see a small correction back up from that zone. That said, if then the bulls are not able to get the rate back above the 1.9350 mark, this might trigger another round of selling, which could bypass the 1.9260 area and hit the 1.9216 obstacle, marked by the low of April 2nd.

Alternatively, in order to examine the possibility for GBP/NZD to see a slightly larger correction to the upside, we would need to wait for a break of the aforementioned downside resistance line and a push above the 1.9450 barrier, marked by yesterday’s high. This way more bulls could join in in order to lift the pair further up, to test the 1.9513 obstacle, a break of which could send the rate a bit higher. This is when we could consider the 1.9577 barrier as the next potential resistance zone, which is the high of May 22nd and also coincides with the extension of the previously mentioned upside trendline.

GBP/NZD 4-hour chart technical analysis

EUR Gaps Up on EU Vote, but Retreats Thereafter

As for the overall results in the EU elections, pro-EU parties retained majority, despite Eurosceptics emerging stronger than previously. While Social Democrats and Conservatives lost the absolute majority for the first time in 40 years, their losses were offset by a strong showing for the Liberals and Greens, keeping the Parliament’s composition EU-friendly.

EU indices traded in the green, perhaps as Eurosceptics did not perform as well as many may have expected, while the confirmation of merger talks between Fiat Chrysler and Renault may have also been a positive catalyst. The euro opened with a small positive gap on Monday but was quick to turn down again and finish the day lower against most of the other G10s. According to media reports, the slide may be owed to remarks from two Eurozone officials that the EU Commission could propose a disciplinary procedure against Italy on June 5th, due to the nation’s rising debt and deficit levels, which are against EU rules. That said, the decision has not been finalized, and any recommendation would be only one step of a lengthy process. EU finance ministers would have to decide whether they agree with the Commission’s proposal, and yet allow Italy to comply with the request. Thus, it may take several months before any decision on further fines comes.

For now, EUR-traders are likely to turn attention to the economic agenda ahead of next week’s ECB monetary policy decision. On Friday, we get Germany’s preliminary inflation data for May, while next Tuesday, we get the numbers from the Eurozone as a whole, with the forecasts pointing to a slowdown. At the latest ECB meeting Draghi and co. reiterated their guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with the ECB Chief noting again that the risks surrounding the Euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”. Thus, following last week’s disappointing PMIs, slowing inflation could prompt investors to raise more bets with regards to additional policy measures by the ECB, beyond the new round of TLTROs, as well as for another delay in the timing of when interest rates could start rising.

EUR/AUD – Technical Outlook

After breaking its short-term upside support line drawn from the low of April 21st, EUR/AUD kept on drifting lower and this morning the rate has fallen below yesterday’s low. Such activity doesn’t really give hope to the bulls, as the pair started forming lower highs and lower lows. For now, we will stay bearish and aim for slightly lower areas.

As we mentioned above, EUR/AUD has dropped below yesterday’s low, at 1.6153, which could have opened the door to the next potential support zone, at 1.6122, marked by the low of May 21st. We could see the rate stalling near that zone, or even retracing slightly back up again. But if the bulls then fail to push the pair above the 1.6153 barrier, this may result in another fall. This time, if the 1.6122 hurdle fails to withhold, a break of it could force EUR/AUD to make its way to the support area between the 1.6085 and 1.6096 levels, marked by the high of May 10th and the low May 20th.

On the other hand, a strong reversal back up and a break above the 1.6187 barrier, marked by yesterday’s high, could invite more buyers into the game and lift the rate to the 1.6210 obstacle. That obstacle played the role of and intraday swing high of May 24th. If the bulls see that area only as a temporary pit-stop, a further move higher may bring the pair to the 1.6247 mark, or the 1.6262 level, which is the highest point of May.

EUR/AUD 4-hour chart technical analysis

As for Today’s Events

The calendar continues to be relatively light today, with the only data worth mentioning being Switzerland’s GDP for Q1, which is already out, and the US Conference Board consumer sentiment index for May. The Swiss GDP accelerated to +0.6% qoq from +0.3%, while the US CB index is anticipated to have risen to 130.1 from 129.2.

As for tonight, during the Asian morning Wednesday, we get New Zealand’s ANZ Business confidence index for May, while the RBNZ releases its Financial Stability Report. Also, the RBNZ Governor Adrian Orr will hold a speech.

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