UK Elections Underway

Daily Analysis - 07/05/2015

Conservatives and Labor Parties Battling to Lead the Coalition

In one of the most contested elections in recent memory, UK citizens go to the polls today to elect members to Parliament. With no party showing a clear lead, the outlook for the Pound is overshadowed by the uncertainty of the potential outcome.

Voting Begins in a Contested Election

One of the most difficult United Kingdom elections to predict in recent memory is creating a tense situation for the Pound as market participants await the results. The increasingly fragmented nature of the UK parliamentary system means that cobbling together a coalition will be challenging for the winning party. The race between the Conservatives and Labour is exceedingly close, with neither side harboring a clear advantage. What will be relevant are the results of smaller parties including the UK Independence Party (UKIP) which has a more nationalistic approach, denouncing the European Union and intent on leaving what it has determined is a broken system. Also noteworthy is the Scottish National Party, harnessing momentum from the most recent referendum to boost the voice of the region as it seeks to extend its influence in national politics. EURGBP is trading substantially stronger ahead of the results, with the Pound down -0.36% versus the Euro since the overnight session.

ADP Shocker

Unemployment data released yesterday from private payroll processor ADP was the worst showing for the data point in 15-months, printing at 169,000 jobs gained, well below estimates of 200,000. The revision lower in the prior two months numbers is also cause for concern ahead of tomorrow’ Nonfarm Payrolls figure and US unemployment rate. This ADP print confirms the trend in employment advances is downwards, meaning that initial estimates for NFP are very optimistic at best. Aside from the weakness in ADP, comments from the Federal Reserve sent stocks lower, starting with Fed Chair Janet Yellen’s remarks that “equity valuations are quite high.” Adding to the weakness in stocks was Atlanta Federal President Lockhart commenting that a September rate hike was “reasonable.” The commentary sent all major benchmarks lower, with the Dow Jones leading to the downside, falling -0.48% to close negative year-to-date.

German Factory Orders Rebound

Although far from having completely recovered, German factory orders released this morning managed to bounce back after contracting for two straight months. Orders grew 0.90% versus the -0.90% contraction recorded in April as a weaker Euro helps to boost export competitiveness. However, looming risks to the outlook remain, especially with Greek negotiations going into the 11^th hour. Without a deal reached between Greece and creditors by Monday, there will be no bailout tranche unlocked for Greece to meet its EUR 774 million repayment next Tuesday. Greek officials speaking on the condition of anonymity highlighted the fractious relationship between the IMF and European Commission as far as terms and objectives for future Greek bailouts. Although the DAX strengthened yesterday after collapsing in the prior session, other regional benchmarks remained weak, with the French CAC 40 falling -0.87% as stocks give up all quantitative easing gains.

USDJPY Equidistant Channel Technical Pattern

Comments about a September rate hike was not enough to reverse the weakness in the dollar, with the USDJPY carry-trade losing ground, falling back below the key 120.00 level and capping four-straight sessions of weakness. The main driver of momentum in the pair in the short-term will be US data with no expected Japanese announcements aside from Monetary Policy Meeting Minutes due overnight. With no imminent changes to monetary policies other than the possible expansion of Japanese easing and higher US rates at least 4-months out in the future, the downward trending equidistant channel formation is likely to remain intact unless a fundamental data point reverses the dollar’s momentum. The prevailing strategy is initiating positions at the upper channel line with the lower channel line targeted. Any move outside the channel should be treated as a breakout trade.