'EUR targeting 1.15 on political relief and ECB taper talk' - Lukman Otunuga, FXTM

LUKMAN OTUNUGA 
PROFILE
• Current Job: Research Analyst at ForexTime (FXTM)
• Career: Spent two years as a research analyst with international currency broker FXCM prior to joining FXTM. Holds a BSc degree in Economics from the University of Essex and an MSc in Finance from the London School of Business and Finance.

View profile at FXStreet

Lukman Otunuga is a research analyst at FXTM. A keen follower of macroeconomic events, with a strong professional and academic background in finance, Lukman is well versed in the various factors affecting the currency markets.

After breaking above 1.10, can the EURUSD keep going up? Or is a sell-the-rally coming with June Fed meeting?

An absence of political risk in Europe has rekindled the appetite for the Euro with prices marching to a fresh six-month high, above 1.1200. With Emmanuel Macron’s victory in the French election dealing a sharp blow to populism and quelling “Frexit” fears, investors have redirected their attention back towards the macro-economics in Europe. An extremely vulnerable Dollar has fuelled the upside rally on the EURUSD, and is likely to elevate the currency higher, in the short to medium term. Euro bulls are back in town with a breakout and weekly close above 1.1200 opening a path higher towards 1.1500. Bullish technical traders are likely to exploit the pending correction towards 1.1100 or a decisive breakout above 1.1200 to sending prices to the 1.1500 level.

Which central bank do you expect to be a bigger market mover on their next meetings: Fed or ECB?

The European Central Bank is set to create serious shock waves across the financial markets if a recent relief of political risk in Europe re-attracts ECB hawks. With the macro-fundamentals in the European economy following a positive trajectory and political risk almost a theme of the past, the ECB could start considering a stimulus exit at the next meeting. Taper talks will likely spark speculations of the central bank raising interest rates in the longer term, consequently boosting the Euro further.

In regards to the Federal Reserve, although markets widely expect the central bank to raise US interest rates in June the recent developments concerning Trump could create some obstacles. An unlikely situation where US interest rates are not increased in June has the ability rattle global markets while exposing the Dollar to further downside shocks.

Will the Trump jitters influence the Fed monetary policy decision next month? Will the Trump jitters influence the Fed monetary policy decision next month?

The Trump jitters are likely to influence the Federal Reserve monetary stance in the longer term rather than short term. With markets heavily pricing in a rate increase in June already, the central bank is expected to raise US interest rates to prevent any unexpected market shocks. As expectations start to deteriorate over Trump’s ability to move forward with the proposed pro-growth policies and US economic data follows a negative pattern, the central bank could be forced to re-evaluate its monetary stance this year. If Fed doves decide to make an appearance amid the uncertainty, the Dollar should find itself vulnerable to steeper losses moving forward.

GBPUSD has also risen above 1.30: How can the UK Snap election affect the Cable surge?

Sterling received a solid boost back in April after the snap general election called by Theresa May boosted confidence over the UK’s ability to secure a clean Brexit deal. Cold water was poured over this optimism following the sour Downing Street dinner in May, which showed how the European Union was willing to play hardball in the talks. Although a victory by Conservatives may boost the Sterling, as investors see Theresa May entering the Brexit talks with a firmer mandate from electorates, the upside should remain limited by a thick layer of uncertainty enveloping the Brexit negotiations.

The GBPUSD has risen above 1.30 on the back of Dollar weakness, but may be destined for further punishment as the Brexit uncertainty haunts investor attraction towards the currency. 

When do you expect the BoE to deliver an interest rate hike? Can it sustain above 2% inflation for a long time without rising rates?

The horrible combination of soft economic data and uncertainty over the Brexit has turned the Bank of England dovish, with markets not expecting an interest rate increase until 2019. Although inflation is currently at a four-year high, at 2.7%, and consumers are feeling the pinch from slowing wage growth, the central bank may decide to maintain a defensive stance. If inflation peaks just below 3% next year, before falling back to target in 2019, and the Brexit negotiations are smooth, then the BoE may be encouraged to raise rates in 2019. On the other hand, an unfavourable situation where economic data continues to weaken and complications arise from Brexit talks could give way to a rate cut.

What about Oil? Can OPEC and non-OPEC producers do anything to push the barrel prices consistently above 50$?

Oil prices have ventured above $50 as optimism continues to rise over big oil producing countries extending output cuts to stabilize the saturated markets. While the cartel may be commended on their ability to repeatedly exploit oils sensitivity to create speculative boosts in prices, such may come at a heavy cost. Although oil prices may edge higher this week if OPEC and non-OPEC producers extend the current output deal by another 9 months, it remains a question of how the U.S Shale will react and if it pumps aggressively. The volatility seen in oil suggests that prices remain entangled in a very fierce tug of war with OPEC bulls and U.S Shale bears. With the oversupply woes still a dominant theme that impacts oil markets, investors will be paying very close attention to how prices react around the psychological $50 level.