Euro and pound on the back foot before UK election, RBA cut by-passed

Count down to UK General Election

With two days to before the UK’s general election, the political uncertainties anchor the GBP-complex on the downside. The sell-off in Gilts pushes the entire UK sovereign curve upwards; the two year sovereign yield advance to 0.56%, the 10-year yield hits 1.90%.

As traders gradually cut their long positions, the downside pressures on GBP should continue rising. The UK’s idiosyncratic risks should comfortably offset the erratic USD sentiment before Friday’s NFP release. A post-election rally is envisaged by the end of the week.

We see opportunity in selling the rallies in GBP-complex. The upside attempts in Cable are seen limited at 1.5185/1.5245 area for a bounce back to 1.5100 support (Fibonacci 50% projection from Apr 13-17 on Apr 21). EURGBP remains capped below 0.7490/0.7510 (pivot / Fibonacci 50% on Dec’14 – Mar’15 drop) while decent vanilla calls are supportive at 0.73/75, 0.74/15 for today’s expiry.

What is the upside potential in FTSE?

Almost all FTSE sectors trade higher in London, the energy stocks gain more than 1% as the WTI brushes against the $60 resistance. Despite a push above 7000 this morning, the appetite for UK equities is expected to wane before May 7 election. The upside attempt in FTSE 100 is seen limited at 7040/7060 for a maximum advance to 7100. For the week following the election however, the market is reinforcing the upside hedge: May 15 calls with 7000/7100 strike cost 21% and 14% more expansive today, while 6850/6500 puts are 36% to 50% cheaper. The market is preparing for a rally after a pre-election pause.

EUR retreats on Brexit fears, Greek talks

Almost a figure drop pulled EURUSD below the 1.1130/10-pivot in the European open and will certainly mark the end of the recent short-term appetite in favour of the single currency. The upcoming UK elections and fears of a ‘Brexit’ inject negative bias in the EUR-complex. Combined to endless discussions on Greek solvability, there is little reason to take a downside risk now that the momentum has significantly lost strength. After a prosper week of recovery, it is time for EURUSD to take a breather. The short-term EURUSD sentiment turns neutral from positive, paving the way to 1.1050 before a potential extension to 1.0901 (Fibonacci 61.8% and 38.2% on Apr 21 – May 1st rally).

RBA rate cut has been by-passed

As expected, the RBA cut its cash rate target by an additional 25 basis points to the fresh historical low of 2%. This is the second time since December that the RBA lowers rate to fight the sinking commodity prices and slowing Chinese growth. AUDUSD spiked down to 0.7788 at the time of decision, yet there has been no follow through after the knee-jerk drop. Despite lower AUD rates, the rate differential with USD, EUR and JPY remains carry-supportive for the Aussie. The oscillations around the 80 cents area are seen likely with the market expecting that the easing cycle has certainly hit the bottom.