Return of European politics [Video]

The Day So Far…

EUR/USD remains lower on the day despite a strong recovery throughout the morning. A trifecta of concerns including Greece, possibility of a snap election in Italy, and dovish communication from the ECB, have all weighed on the currency pair. Firstly, press reports in the German Bild newspaper suggest Greece may reject the next badly needed injection of cash from their European creditors. While this may sound bold from a negotiation point of view, I highly doubt it would be something the Greek government would commit to as they know full well the size of redemptions looming in July with would be impossible to meet unless their receive more short-term funding. Those that have traded long enough you will know this is the usual game of brinkmanship for a deal typically to get signed off at the 11th hour and I see this time being no different. Meanwhile, reports from Italian press suggest a possible new electoral system may be introduced which could result in a election taking place in the Autumn, instead of waiting until 2018. This brings back concerns over what powers the 5SM could obtain in the scenario of a snap election with the party leading in 4 of the last 10 opinion polls. The margin of difference between Beppe Grillo and the PD party is just +-2%, and with only two other parties (Forza Italia, Lega Nord) that would qualify in a new proportional format, the possibility of a hang parliament is a legitimate risk should the reform take place. The final part of the trio of news has been the dovish turn from the ECB where President Mario Draghi has said to lawmakers that he is “firmly convinced” to stick with QE, while the uber-hawk Jens Weidmann added that “in light of subdued price pressures, an expansionary monetary policy continues to be appropriate in principle”.

Looking elsewhere, a quick update on the latest UK election polls which have seen a slight re-widening from last weeks most narrowest levels. The gap now ranges between 6% to 14% with the low side reflecting the likes of YouGov which has a slight difference in methodology by placing a higher importance on respondent’s self-reported likelihood of casting a ballot rather than historic performance according to demographics. Despite the negative response Theresa May’s u-turn on the dementia tax had with the older vote the decisive factor on how big the Tory majority will be still depends on what level the youth turn-out will be next Thursday.

The Day Ahead…

Although the EUR future has briefly broken the support level from the last two sessions at 1.11730, I would still feel more comfortable with the short given the fundamentals discussed above. As such, a short from the high on Monday, which also matches up with the 1.12000 handle and daily pivot level looks interesting intraday. Meanwhile, following the ‘buy the rumour sell the fact’ type price action that occurred in oil post OPEC meeting last week, our bias remains short given OPEC will be unwilling to step in again so soon after taking action and amid an on-going increase in US crude production which is now at 21-month high with US rigs being added for a 19th consecutive week.