Caution prevails ahead of key events

June 7, 2017 09:02 AM

An air of caution lingered across the financial markets on Wednesday as investors rushed to the sidelines ahead of a week filled with key political and macroeconomic events. Asian equity markets were mostly mixed this morning amid the subdued trading mood while European stocks opened cautiously higher. the financial market closed in the red territory on Tuesday and may follow the same pattern this afternoon as anxious investors avoid riskier assets. With Risk-off potentially becoming the name of the game ahead of a trio of major risk events on Thursday, the flight to safety could support safe-haven assets such as gold and the Japanese yen.

Will the ECB surprise markets?
The current relief from political risk in Europe and encouraging macro-fundamentals for the European economy has made the Euro a champion amongst its pairs. The sentiment is turning increasingly bullish towards the currency and this can be reflected on the euro/U.S. dollar (EUR/USD) currency pair which currently trades around a seven-month high at 1.1275 as of writing.

Much attention will be directed towards Thursday’s ECB meeting which can be labeled as a major event risk for the euro. Although it is widely expected that the central bank will leave monetary policy unchanged in June, investors will be paying very close attention to see if there are any hints of the ECB tapering in the future. With confidence steadily rising over the health of the European economy amid the improving fundamentals, it will be interesting to see if the ECB dishes out a hawkish surprise. 

Sterling on standby ahead of UK General Election
The Sterling/dollar was static on Wednesday as investors remained on the fence ahead of Thursday’s General Election in the UK. With poll results varying from Labour making minimal gains to a potential “hung parliament” scenario, Thursday’s election outcome is uncertain. I feel that this growing uncertainty ahead of the General Election should leave Sterling vulnerable to further losses. While a scenario where UK Prime Minister Theresa May secures victory in the UK General Election could support the pound, the upside could still face some headwinds against ongoing Brexit uncertainty. From a technical standpoint, the British pound/U.S. dollar (GBP/USD) currency pair is currently on standby with prices trading around 1.2900 as of writing. A hung parliament situation could expose Sterling to extreme downside risks with 1.2600 acting as the first checkpoint.

Dollar Index pressured below 97.00
The Greenback has lost some of its charisma this year with the outlook tilted to the downside as political uncertainty in Washington and soft U.S. economic data weighs on the currency. With the Trump rally, a theme of the past and expectations fading over U.S. President Donald Trump moving forward with the proposed fiscal spending, dollar bullish investors have lost the inspiration to support prices. Although the Federal Reserve is widely expected to raise U.S. interest rates in June, the longer-term hiking path remains clouded amid the uncertainty and as such, has contributed to the dollar’s woes.

The main event risk for the dollar this week will be the testimony of former FBI Director James Comey before the Senate Intelligence Committee on Thursday. If Comey shares any new information on whether President Trump wanted him to stop investigating his connections to Russia, the Greenback may be exposed to further losses.

About the Author

Lukman Otunuga is an FXTM research analyst