By Margaret Yang, CMC Markets
Volatility in the forex market surged yesterday evening after UK Prime Minister Theresa May unexpectedly announced plans to call for a snap election on 8 June.
The move is expected to strengthen the government’s mandate heading into Brexit talks, and catalysed a strong rally in British Pound. GBP/USD soared over 270 pips, or 2.2% last night, reaching as high as 1.2905 before coming off to the 1.2837 area this morning.
Technically, GBP/USD has broken out above the key resistance level of 1.270 (23.6% Fibonacci level) and the seven-month long sideway range (1.200-1.270) has finally been broken through. The next resistance level can be found around the 1.314 area, which is the 38.2% Fibonacci retracement level. Today the news will be digested by Asian traders, but volatility is expected to cool down.
The FTSE 100 index was hammered by the sudden surge in sterling, down 2.46% last night. European markets closed broadly lower on the UK’s decisive move toward Brexit, and on ongoing geopolitical tensions in the Middle East and North Asia. Negative sentiment spread over to the US market as well, with the Dow Jones losing over 0.5%.
Asian markets have displayed a similar pattern, with sellers dominating market sentiment. The Hang Seng Index future lost over 400 points yesterday, registering its biggest intra-day swing in more than two months.
This reminds investors of the old saying, ‘sell in May and go away’, which suggests that stock markets will incur heavy selling in the month of May, due to seasonality as well as psychological hints, which in turn reinforce the selling pressure. This year, the ‘sell in May’ scenario has been brought forward with so many uncertain factors coming together. Some key risk events and their potential implications are summarised below:
- Corporate earnings – SPX, STI, HSI\
- French election – 23-24 April – EUR/USD, French 40, VIX
- Trump’s foreign policy (Syria, North Korea) – Gold, silver, USD/JPY, crude oil
- Fed to cut balance sheet – Mortgage rate, treasury yield, SPX, Dollar Index
Hong Kong 50 – Cash