Contracts for difference (CFDs) are a useful tool for trading election results. CFDs give traders leveraged access to trading major indices and currencies, which tend to react swiftly to big national-level developments like elections.
While CFD and forex trading can be active through election campaigns, their advantages are most evident during election nights. Unlike stocks and exchange traded funds for instance, some indices and forex CFDs can be traded around the clock on weekdays and are not limited to exchange hours.
On election nights, this means that CFD and forex traders can take advantage of moves in the market in the evening after official polls close and exit polls come out, overnight as the official results start to come in, as well as in the early morning hours when the final results are out.
As 24-hour trading means that markets are open throughout the counting period, the risk of gapping is lower in CFDs, relative to exchange-traded instruments.
UK election: an evolving scenario
The UK is holding a general election on Thursday 8 June, with the government looking for a stronger mandate to support its goals and positions for the upcoming Brexit negotiations with the European Union. In the run up to the triggering of Article 50, there had been opposition from MPs in jurisdictions where constituents had voted in favour of Brexit. This election will enable voters to clear the air and weigh in on what they think of MPs who they believe haven't been listening to them.
So far, the Conservatives have been leading by a wide margin, with support running in many cases double that of Labour. A lot can change over the course of a campaign, however, and there is still potential for significant market action around the results.
Since the vote was called, anticipation that the result will strengthen the government’s hand has been greeted positively by the market, with sterling climbing relative to the US dollar, euro and Japanese yen.
The FTSE 100 has been trending opposite to the pound since the Brexit vote last summer, with sterling’s collapse following the vote sparking a major rally in the UK’s blue-chip index. In recent months, however, a big top has been forming in the FTSE opposite to a big bottom forming in GBP/USD.
Potential national impact on the FTSE and UK stocks
The election result may spark a re-evaluation in stocks. The potential for a hard Brexit rises the more seats the Conservatives win. On the other hand, if the Conservatives don’t win a bigger majority, or Labour outperforms, the risk increases that the EU may only offer the UK a bad deal, which arguably would have been the case with the former prime minister David Cameron.
So far, strong polling for the Conservatives has boosted GBP and weighed on the FTSE. If this continues, the market may price in much of the result ahead of time. If Labour or the Liberal Democrats pick up more seats than expected, it could knock sterling back and boost the FTSE.
Possible regional effect on the FTSE and UK stocks
With Labour struggling in the polls, it’s possible that regional parties may become the main alternative to the Conservatives in Scotland, Northern Ireland and Wales. Support for the Scottish National Party could have a significant impact on markets following the election, because of the party’s call for a second referendum on independence.
If the Conservatives are able to pick up seats in the three devolved regions, it could be seen as a sign of unity, strengthening the government’s negotiating position and potentially boosting sterling at the expense of FTSE stocks.
On the other hand, if the Conservatives do poorly in these areas, the EU could attempt to use differences between regions to attempt to divide and conquer the UK in negotiations. A strong showing by the SNP or other regional parties could have a negative impact on GBP. Even though such an event could provide a short-term boost to the FTSE, in the longer term the increased risk of a bad deal or internal turmoil could have a negative impact on UK stocks.
UK election and the forex markets
It’s important to remember that currencies trade in pairs. Some of the sterling-related FX pairs which could be most active around the election include:
Cable is the most actively traded sterling pair and was extremely volatile around the Brexit vote. After collapsing following the June vote, cable has been bottoming and base building in recent months, picking up since the election call.
With Brexit the core issue of the current campaign, the channel cross is likely to be extremely active on the election result and through the negotiating time frame as markets speculate on who is more likely to come out on top in an eventual deal.
GBP/JPY and GBP/CHF
The election could have a big impact on how sterling trades relative to traditional risk havens like the Japanese yen and Swiss franc. So far, sterling has been soaring against the yen since the election call, indicating that traders have been pricing in a big win for the Conservatives. A different result could spark a significant reversal.
Potential gold trading examples
The UK election result may also have a more general impact on risk sentiment and tolerance in world markets. This may particularly impact trading in GBP relative to gold, the world’s premiere hard currency.
To capture the performance in sterling relative to gold, a trader can use two contracts, GBP/USD and Gold (XAU/USD), going long one and short the other to mimic the performance.
For example if a trader thinks gold could outperform sterling, they could:
- Short GBP/USD = Selling sterling while buying USD
- Long Gold (XAU/USD) = Buy Gold while selling USD
The two USD returns cancel each other out, giving a trader the combined performance of being short sterling and long gold.
On the other hand, if a trader thinks sterling could outperform gold, they could:
- Long GBP/USD = Buying sterling while selling USD
- Short Gold (XAU/USD) = Selling Gold while buying USD
The two USD returns cancel each other out, giving a trader the combined performance of being long sterling and short gold.
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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