The big day that traders have been anticipating all week has finally arrived. Stocks, commodities and currencies have been steady, waiting for potentially big developments today.
Markets tend to reflect the combined expectations of participants at any given time, so the reactions may depend on whether there is a surprise and if so, whether the surprise is positive or negative and whether it's a small or large surprise.
First up is the ECB meeting. The decision and statement are due at 745 am EDT with the more important Draghi press conference at 830 am EDT.
EUR pairs are the main market in focus on this news. Following the Macron win in France, which was seen as a victory by pro-euro forces over Euroskeptics, EUR has been rallying. Gains have been driven by expectations that multiple setbacks for the populists and Euroskeptics, plus Merkel opening up a lead in Germany could enable the ECB to cut back on stimulus sooner.
Expectations heading in have been for the ECB to hint normalization could be accelerated, tempered by recent reports the inflation forecast could be lowered. A slightly hawkish shift may not have much impact. A strong hint toward a coming normalization move could boost the euro a bit. Wishy washy or leanings toward ongoing dovishness and stimulus could send the euro sharply downward.
Second, former FBI Director Comey is set to testify to the Senate Intelligence Committee starting at 1000 am today. His prepared remarks were released yesterday afternoon, so the question and answer session may be more important.
The big impact for trading in the US dollar and US stocks from this is whether or not this encourages politicians to try and impeach President Trump or not. The prepared remarks suggest the answer is no but at the same time is likely to encourage investigators to keep digging.
The testimony is likely to generate a lot of noise in the media and may continue to distract the administration and Congress potentially delaying or disrupting pro-business reforms. It would take a big surprise to knock the Fed off course toward a big rate hike next week.
Third, is the UK election where voting is underway. Polls close at 500 pm EDT, 200 pm PDT with exit polls due shortly afterward.
The main impact of the results is likely to be on GBP pairs, particularly GBP/USD and EUR/GBP and the FTSE. Traders may view the results in terms of whether the enhance or undermine the government's position in Brexit negotiations with the EU. In recent months, developments or polls favouring the Conservatives and a hard Brexit have boosted the pound.
Based on this, UK market action may depend on how well the Conservatives do at the poll that counts. Recent pre-election polls have been all over the place showing Conservative leads varying between 1% and 12% averaging about 7%. Sterling advanced Wednesday and has been holding on to the gains today suggesting cable is likely pricing a moderately increased Conservative majority say somewhere around the 64 seat majority forecast by Lord Ashcroft’s model.
A majority of over 100 seats could push the pound higher and send cable back above $1.3000 with next technical resistance near $1.3150. A small Conservative majority could send sterling down slightly, say back toward $1.2900 or even $1.2800.
The Black Swan (low probability, high impact) scenario lurking out there that traders should keep in the back of their minds is that a loss of the Conservative majority could send Sterling down sharply. This seems unlikely as Conservative parties in many countries have tended to poll below their actual support in recent elections.
Generally speaking the FTSE may continue to trade in the opposite direction of GBP, with a selloff in stocks possible if the Conservatives win big and sterling rallies. On the other hand, a surprisingly strong showing by Labour which could be bearish for Sterling could be bearish for stocks in the longer term as well, given Labour’s agenda.
Today’s developments may also have an impact on capital flows out of defensive havens depending on what they mean for political and economic uncertainty. Surprises that raise fears could send gold and JPY higher, while news that meets expectations or eases concerns could spark corrections of the gains these two markets made earlier in the week. .
Although likely to be overshadowed by developments elsewhere, traders in Canada should note that the Bank of Canada is releasing results of a review of Canada’s financial system today. This could have an impact on trading in Canadian financial stocks today.