What’s happening?

UK markets have stolen the spotlight to start the week with PM May preparing to call a snap election for June 8th to clear the air on the government’s Brexit negotiating position. This news has sparked in both GBPUSD and the UK 100 both of which have been close to completing head and shoulders patterns which indicate significant trend changes may be underway.

Technicals:

Following last summer’s Brexit referendum decision, Sterling plunged, sending the UK 100 soaring. In recent months, however, that initial effect has subsided. The lower pound ignited the UK economy and a lot of the initial fears of Brexit Doom turned out to be overblown. As the triggering of Article 50 approached and passed, GBPUSD formed a big head and shoulders base while the UK 100, still trading in the opposite direction, formed a big head and shoulders top. With 7,200 also failing to hold, next potential downside support appears near 7,140, 7,100 and a measured 7,080.

The UK 100 has broken down below 7,260 to start the week, completing the top and signalling the start of a new downtrend. RSI breaking under 40 to complete a descending triangle confirms a downturn in momentum. 

GBPUSD, meanwhile, has been forming a head and shoulders base since October. Since the completion of the right shoulder in March, Cable has been trending upward with support moving up toward $1.2360. The pair recently broke out of a short-term downtrend. To start the week, the pair has rallied up off of $1.2500, through its 200-day average near $1.2620 and is testing $1.2685 the neckline of the basing pattern and also a 23% Fibonacci retracement of the previous downtrend. RSI is breaking out over 60 to indicate upward momentum accelerating. Next potential resistance on a breakout by the pair may appear near $1.2760 then $1.2900.

 

Fundamentals:

It took a few months for the market to digest the decision by the UK to leave the EU that took the street by surprise. Positive UK economic data post-vote, the release of details on UK and EU initial negotiating positions, the realization that cries of Brexit Doom were totally overdone and recognition of the opportunities Brexit may create for the UK has calmed traders. Since the beginning of the year, moves toward Brexit have boosted the pound while opposition and setbacks have weighed on the Pound.

The move toward calling a snap election for June 8 has taken the street by surprise as PM May had previously been indicating that the current government was planning to serve out its term until 2020.

So far, the street has taken the news of an election as a positive, giving the country a chance to clear the air before negotiations start, to provide the government with a clear mandate for negotiations and to provide voters an opportunity to deal with MPs who have not been respecting their wishes (particularly those who have been opposing Brexit in Parliament even though their constituents voted in favour of Brexit in last year’s referendum).

Currently, it appears that traders have been seeing news that favours PM May and Brexit as bullish for GBP pairs and bearish for UK shares, with news favouring the opposition as bearish for GBP pairs and bullish for UK shares.  

 

Heightened market volatility is likely over the election period, this could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.

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