Euro Gripped by Political Uncertainty

Sunday saw over 2.2 million people turn out to vote in the Catalan Independence Referendum. It’s a far cry from the region’s 5.3 million registered voters, many of whom were deterred or prevented from voting by authorities keen to stop the ‘illegal’ poll, reports FXTM Market Analyst, Lukman Otunuga. Initial data suggested around 90% of those who cast their votes were in favor of independence but, given the chaos on voting day, these figures remain subjective.

The news saw the Mighty Euro shudder yesterday, starting the week on the back foot as the reaction to the Catalonian Referendum rippled across the markets. Anxiety over political uncertainty in Europe sparked negative momentum for the Eurozone currency, which charted a noticeable decline once trading opened for the week on Monday morning.

However, widespread weakness failed to materialize. The Euro fell 0.6% to $1.1740 but managed to avoid a dip towards last week’s month-lows of $1.1715. On Tuesday morning, The Euro is trading flat versus the US dollar as of 8:30 GMT at 11742. German bonds were also down 0.46%, but by and large investors appeared to view the Referendum as a national issue. The main Spanish equities index, IBEX 35, fell 1.7% on Monday, while other major European stocks remained in good health, with bourses including Euro Stoxx 600 and Xetra Dax 30 making gains.

While the Eurozone currency seems to have weathered the initial blow, there may still be worse to come. United Nations (UN) High Commissioner for Human Rights, Zeid Ra’ad al-Hussein, is on record condemning the violence of Spanish authorities in attempting to prevent the vote. The civil rights group Amnesty International has issued a similar statement. European leaders are already distancing themselves, positioning the issue as a domestic one for the Spain alone to deal with. Poland’s foreign ministry labeled the issue “internal,” while French President Emmanuel Macron praised Spain’s “constitutional unity” a mere 24 hours after the vote.

Sunday’s vote gave Catalonia’s President, Carles Puigdemont, a clear mandate to declare independence, something he is widely expected to do today. If he follows through on this intention, then the Euro could be in for a rough ride as the week progresses. Taking a look at the technical picture, political uncertainty may already be casting a shadow. EURUSD is coming under pressure on the daily and weekly charts. Bulls are looking tired on the weekly with sustained weakness below 1.1680 encouraging a decline towards 1.1600 and 1.1500, respectively.

Currency spotlight – GBPUSD          

While yesterday’s headlines were focused on Catalonia and potential ramifications from the vote, the British Pound fell 1% on the back of Dollar strength. The pound continued its drop on Tuesday morning to trade at 1.3258, down 0.15%.

Market players looking for a reason to push Sterling lower got the signal to attack yesterday, following weaker growth in UK manufacturing. Buying sentiment was already bruised thanks to a fresh bout of Brexit uncertainty brought on by soft economic data.

As the Conservative Conference kicks off and political threats, gloats and inter-party jostling continue to dominate the British headlines, Sterling bears are gaining confidence. The currency could be in for further uncertainty this week, with downsides expected on GBPUSD as the Dollar continues to appreciate.

From a technical perspective, the GBPUSD is under intense pressure on the daily and weekly charts. Sustained weakness below 1.3300 may open the gates towards 1.3150.

This article is written by Lukman Otunuga, a senior analyst at FXTM