UK ELECTION - Ok...so today is going to be a busy day, particularly in the North American session. We have three big risks to be thinking about. The UK election will be going on for the entire day but we probably won't know where things are until about 5pm New York time. With the UK election, the market will be wanting to know if those calls for the snap election several weeks back are going to pay off and give the Conservatives the majority they are looking for. In the lead up, some of the polls have been a lot tighter than many had thought, but it looks like the PM will get her majority. At the same time, I see no benefit in trading ahead of this event.
EVEN IF WE KNEW - The UK election is one of those situations where even if you know the result, it would be hard to say with confidence how the Pound will react. If we consider the base case of a majority government, while confirmation could be viewed as Sterling supportive, one could just as easily make the argument that we could see a sell the fact reaction or a renewed wave of worry with the result reminding markets that it could mean a very hard Brexit. Similarly, when considering the unlikely outcome of a Labour victory, the same case can be made. If Labour did somehow pull it off, the initial reaction might be Sterling bearish, but a Labour victory also means softer or no Brexit, something the Pound would have been very happy to hear about back in 2016. Perhaps the one outcome where the price action would be easier to predict is the hung parliament outcome where the Conservatives remain in power but lose their majority. This would stifle the entire Brexit process and make for a big headache, sure to weigh on the Pound.
THE PLAY - Strategically, my view with this election risk is to hold off and wait for the post event volatility to play out and then maybe look to jump in and fade an initial move that looks overdone. Looking at the GBPUSD rate purely from the technical side, this is a chart that has taken out major resistance at 1.2775 several weeks back, opening the door for a structural shift that exposes a push towards 1.3500 in the days ahead. At the same time, this does not mean we can't see a shot of weakness before the burst, and ideally, this is where I would be looking to take advantage. I believe a drop into the 1.2500 area is well within the realm of possibility and that is where I would get excited about getting involved.
THE ECB DECISION - Moving on, there are two other big risks today. The first is the ECB decision. The market has been buying the Euro in 2017 off multi-year lows, with the single currency benefiting from reduced structural risk, improving economic data and chatter of the ECB getting ready to reverse monetary policy. Still, Draghi hasn't gone along with this hawkish story line in recent appearances, with the central banker continuing to cite subdued inflation as a reason to keep policy where it is right now. And so, the reality is that most of the Euro strength in 2017 is coming from broad based US Dollar weakness on account of scaled back Fed rate hike odds and US protectionism. But if the ECB does sound more hawkish today, it could fuel that next big move into the 1.1500-1.1700 area, where there is strong resistance.
THE TESTIMONY - Finally, former FBI director Comey will testify before the Senate Intelligence Committee at 10am NY time on the topic of Russian interference in the US election. In the lead up the market has been worried about the possibility the hearings could cast an even darker shadow on the Trump administration. But there has been some recent speculation the testimony will not be as damaging as initially thought. Again, with this, it's best to hang on and wait to see how it all plays out. I actually think this one could prove to be a non event for markets that haven't really been bothered by all of the political drama thus far. It seems to me that even an impeachment would do little to weigh on this US stock market rally that continues to be focused on the lure of lower for longer rates and nothing else.
WHAT'S OPEN - My only exposure into Thursday is long AUDNZD and short SPX500. There's nothing to really talk about with either of these trades right now as AUDNZD is in its infancy and the SPX500 isn't making any moves to the downside yet. My key levels to watch with both of these markets are 1.0600 and 2320 respectively. A break above 1.0600 in AUDNZD and a break below 2320 in the SPX500 will give both of these trades the momentum necessary to deliver the moves I'm looking for. Of course, they are completely different trades, but those are the key levels for each of them. I'd love to see what else comes our way today but as always, I'm just going to sit back and wait for the market to come to us.