By GrowthAces.com

Macroeconomic overview: Yesterday, market attention was squarely on ECB communication, particularly on the forward guidance. The only relevant change to the European Central Bank guidance was the decision to drop the reference to the possibility of lower policy rates, which Draghi justified with the disappearance of deflation risks. This is in line with our expectations. The other key parts of ECB communication remain unchanged. These include: 1. The exit sequence (rate hikes only after QE is over); 2. The expected time lag between the end of QE and the first rate hike (the “well past the horizon” language was confirmed); 3. The easing bias on asset purchases (the ECB restated “we stand ready to increase our asset purchase program in terms of size and/or duration”). In a nutshell, we think the ECB made the smallest possible changes to its communication considering the unambiguous brightening of the growth outlook.

The new macroeconomic forecasts revealed slightly stronger growth but weaker inflation. The GDP forecasts were revised upward by 0.1 percentage point in each year of the forecast horizon, now showing growth of 1.9% this year, 1.8% in 2018 and 1.7% in 2019. This more constructive assessment is not surprising and seems to mainly reflect the ongoing improvement in global trade.

Also the inflation forecasts moved in the direction we had predicted – down – but the revisions were larger than expected. Headline inflation is now seen at 1.5% in 2017 (-0.2 percentage point), 1.3% in 2018 (-0.3 percentage point) and 1.6% in 2019 (-0.1 percentage point), with revisions mainly due to lower oil prices. Although Draghi dismissed it, we note that the core inflation path for 2018-2019 was lowered by 0.1 percentage point in each year, respectively to 1.4% and 1.7%. This revision is important because it comes while the ECB raises its growth forecasts. Given that second-round effects from lower commodity prices are unlikely to have been the main trigger, this is probably telling us that the ECB has started to have a hard look at its models to correct some of their overly optimistic price outputs.

Where do we go from here? Draghi was clear: the ECB has a price mandate and more patience is needed before stronger economic growth puts upward pressure on core inflation and wages. Unless economic growth starts losing momentum, we think the Governing Council remains on track for a tapering announcement in September, with implementation starting next year. Technical constraints will play a key role in the decision to taper, and recent experience (i.e. December 2016) shows that the ECB can announce a reduction in the pace of purchases even when lowering its forecasts for core inflation. That said, it is becoming increasingly clear that policy normalization in 2018 will happen at a slow pace.

FBI Director James Comey accused President Donald Trump of firing him to try to undermine the bureau’s investigation into possible collusion between his 2016 presidential campaign team and Russia, but did not say whether he thought the president sought to obstruct justice. But currency markets had already largely shrugged off Thursday’s testimony by Comey, which had been seen as the week’s other big event.

Technical analysis: The EUR/USD broke below 14-day exponential moving average and is testing 23.6% fibo of May rally today. A close below this level would be a bearish signal. We think that a corrective move to 50% fibo (at 1.1061) is likely in the coming days.

Short-term signal: As we expected, yesterday’s ECB statement spurred some profit taking on recent EUR/USD rise. We stay short (at 1.1235) for 1.1070. The short-term correction does not change our long-term bullish view.

Long-term outlook: Bullish

GBP/USD: Hung parliament generates huge political uncertainty

Macroeconomic overview: Theresa May’s Conservative party has surprisingly lost its majority in the House of Commons. It’s a disaster for her. She called this snap general election to give her a stronger hand in Brexit negotiations. Instead she is substantially weakened by the result and is facing pressure to resign as Conservative party leader. The result has generated huge political uncertainty.

The share of the popular vote is Conservatives 42.4% (up from 36.8% in 2015), Labour 40.1% (up from 30.5% in 2015), Lib Dems 7.2% (down from 7.9% in 2015), SNP 3.1% (down from 4.7% in 2015), and UKIP 1.9% (down from 12.7% in 2015). The Labour party under Jeremy Corbyn’s leadership performed much better than expected, increasing their number of seats and vote share. The pro-EU Lib Dems failed to make a breakthrough, while the biggest change compared to the last election in 2015 was the widely expected collapse of the UKIP vote. More former UKIP voters switched to Labour than expected. Turnout was high at 68.7%, up from 66.4% in 2015, suggesting many more young voters than usual turned out to vote, mostly for Labour.

The result raises a lot of questions, the answers to which will only become clear in the hours, days and months ahead.

Who will form the next government? The Conservatives are still by far the biggest party and will try to form a minority government, likely with support from the DUP on the basis of confidence and supply (rather than a formal coalition). A coalition of Labour, SNP and the Lib Dems would fall short of a majority (and the seat tally of the Conservatives), as well as being politically difficult. However, a Conservative government would be substantially weakened, relying on other parties to pass legislation, substantially raising the probability that new elections will be called.

What happens with Brexit? negotiations with the EU on Brexit were due to start in just over a weak, but the election result is likely to delay this. If the Conservatives indeed form a minority government, with support from the pro-Brexit DUP, it would likely result in an even harder Brexit. The hard-line eurosceptics in the Conservative party would continue to have a lot of bargaining power, making an orderly withdrawal from the EU less likely. According to Article 50, the UK falls out of the EU in March 2019 irrespective of whether there is a withdrawal agreement, unless there is unanimous agreement to extend the talks. On the other hand, the result strengthens the opposition to a very hard Brexit with Labour, SNP, and the Lib Dems, when taken together, increasing their number of seats in the House of Commons.

Following results of the general elections, we expect UK risky assets to come under pressure, as markets will start pricing in a scenario of high political uncertainty, a growth slowdown and possibly disorderly Brexit. The currency market has responded in a rather predictable fashion to the prospects of a UK hung parliament: GBP/USD fell below 1.2700, levels not seen since mid-April while EUR/GBP rallied strongly above 0.8800, its highest rate since early January.

Technical analysis: Today’s drop in the GBP/USD was stopped at 61.8% fibo of April-May rise. Daily cloud base at 1.2578 could be another bear target.

Short-term signal: We stay sideways as huge political uncertainty makes GBP trading too risky.

Long-term outlook: Flat

TRADING STRATEGIES SUMMARY:

FOREX – MAJOR PAIRS:

FOREX – MAJOR CROSSES:

PRECIOUS METALS:

How to read these tables?

1. Support/Resistance – three closest important support/resistance levels
2. Position/Trading Idea:
BUY/SELL – It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
LONG/SHORT – It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.
3. Stop-Loss/Profit Locked In – Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.
4. Risk Factor – green “*” means high level of confidence (low level of uncertainty), grey “**” means medium level of confidence, red “***” means low level of confidence (high level of uncertainty)
5. Position Size (forex)– position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
Position size (precious metals) – position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD / USD 10,000) * (our position size).
6. Profit/Loss on recently closed position (forex) – is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
Profit/Loss on recently closed position (precious metals) – is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
About the Author:

By GrowthAces.com – Daily Forex Trading Strategies