To say there’s a lot going on this week would probably be an understatement. Politics will of course take center stage both in the UK (election) and in the US (Comey testimony).

Saturday night’s terror attack in London adds another layer of uncertainty to the situation in the UK, where recent tightening in the polls has kept markets on edge.

Thursday’s ECB decision is expected to bring a shift in the central bank’s forward guidance. This has been telegraphed for some time (which is ironic because forward guidance is itself “telegraphing” so we’re now “telegraphing” the “telegraphing”), but the market will be watching the wording closely and you can bet they’ll be all kinds of algo, knee-jerking FX fun around the release.

“We expect Draghi to erase the ‘or lower’ when referring to the future possible path of rates and shift the balance of macroeconomic risks to neutral from ’tilted to the downside,’” BofAML wrote this weekend, adding that “we also expect Draghi to point out that the ECB stands ready to increase the asset purchase program in terms of size or duration but remark that this would be now less likely.”

In short, there are some potential land mines out there and it’s pretty clear that in all cases, FX will be the transmission mechanism be it in sterling, the euro, or, in the case of Comey’s testimony, USDJPY.

For their part, Barclays notes that given the above, “carry trades are vulnerable to a pick-up in volatility this week.” Find more from the bank’s Sunday “Thoughts For The Week Ahead” note below along with a calendar from BofAML…

Via Barclays

We think carry trades are vulnerable to a pick-up in volatility this week. While improving manufacturing confidence has recently added to the constructive global risk environment (characterized by dovish central banks, low cross-asset volatility and rising equity prices), a potential increase in political uncertainty in the US may undermine this backdrop.

Ex-FBI Director James Comey is scheduled to give evidence to the Senate Intelligence Committee on Thursday. His testimony may raise further questions about the stability of the Trump Administration and its ability to deliver fiscal stimulus. Corresponding FX volatility would likely erode weekly carry trade gains. For example, our favoured carry trade basket of long INR and RUB versus SEK and CAD earns 13bp of carry each week (6.9% annually) but experienced a spot depreciation of 90bp when the bribery scandal involving President Temer in Brazil emerged on 17 May.

A change in ECB forward guidance or risk assessment is widely anticipated at its Thursday meeting (Figure 1).