With the OPEC meeting now in the past, investor attention has shifted towards the United Kingdom and the upcoming General Election scheduled for 8 June. Although the market currently appears calm ahead of the event, this event it does represent a risk for emerging assets and this will include those markets in the UAE and GCC region.
With investors currently positioning in favour of Theresa May being declared victorious next week, there is a risk that investors are heavily underpricing any other potential outcomes at present. The largest risks to emerging market assets are generally when potential outcomes are heavily underpriced, and recent history from the EU Referendum last June is a kind reminder of what can happen when investors are caught on the wrong side of the trade. If recent history does indeed repeat itself then investors are more likely than not going to divert into “risk-off” mode, where riskier assets like the stock markets and emerging assets suffer from low attraction and safe-haven assets like Gold and the Japanese Yen surge from buying demand.
Politics to continue influencing the Pound’s direction
After suffering its heaviest week of losses so far in 2017, the British Pound is attempting to consolidate around 1.28 against the US Dollar. I personally think that politics will continue to influence the direction of the British Pound and I believe that there is further momentum for the currency to fall with the UK General Election being a little over a week away. In general, the markets do not like uncertainty and this is the recurring theme for the UK at present with another election around the corner and ongoing Brexit uncertainty continuing to dominate news headlines.
My view is that even following the dip lower from the 2017 highs above 1.30 is that the financial markets are still underpricing the risk of an unexpected outcome to the election next week. Investors in general stacked their cards heavily in favour of Theresa May being declared the winner following the unexpected calling of a snap election, but opinion polls are currently showing that the race to win the election is going to be close. I can’t help but think that recent history could be repeating itself with the markets currently underpricing the risk of an outcome that could differ to what the markets expect, which is a Conservative victory on 8 June.
USDJPY – a game of politics vs economics
The British Pound is not alone in being underpinned to political risk, with politics vs. economics being the name of the game when it comes to trading the USDJPY. I believe that politics will continue to dictate the direction of this pair as we head into the second half of 2017, and I am actually favouring towards the Japanese Yen covering further ground against its counterparts on the back of safe-haven buying.
A lack of optimism around the likelihood that President Trump will be able to push forward with his legislative reforms will put the spotlight firmly on Washington, and I think that this will result in further pressure on the USD. Any further market uncertainty in the United States will eventually lead to investors being lured back into the safe-haven appeal of the Yen.
EURUSD – facing near-term selling pressure
The likelihood that the ECB will repeat its dovish rhetoric during its Central Bank meeting in June is encouraging traders to enter selling positions on the Eurodollar after the pair reached new 2017 milestone highs above 1.12 last week. Despite economic data around Europe continuing to improve confidence that the economy has turned a corner, the market is swaying towards the belief that the ECB will repeat in June that the economy still requires ECB stimulus and this could result in the Eurodollar slipping further towards 1.10.