The UK general election is set to take place on Thursday 8 June, and the race to the wire has turned out to be a lot closer than it looked at the start of the campaign.
The results could determine whether the UK enters Brexit negotiations with a strong or weak mandate from the public, and so the results could have a significant impact on the trend in sterling heading into the summer.
Following last summer’s Brexit vote sell-off, GBP/USD formed a head and shoulders base between $1.1985 and $1.2715. Back in April, cable broke out of the base and rallied up toward $1.3000. A golden cross of the 50-day average up through the 200-day average was also seen as a positive sign of renewed accumulation.
In recent weeks, however, the technical tables have turned. Cable failed to hold above $1.3000, then turned back downward. A break of $1.2950 completed a bearish rising wedge, broke a trend support line and signalled a downturn. Since then, resistance has dropped closer to $1.2900. RSI falling back under 50 has confirmed a downturn in momentum.
So far, the recent sell-off looks like a normal downward correction within a larger uptrend, especially with support coming near $1.2790, a common 23% Fibonacci retracement of the previous uptrend. Addittional support appears near $1.2760 the 50-day average and $1.2700 the former neckline and breakout point from the head and shoulders base.
On a breakout over $1 2900 the next support may appear near $1.2940, then $1.3000 and $1.3040. A breakdown below $1.2700 would signal the start of a new downtrend with next potential support near $1.2635, then the 200-day average near $1.2590.
The way markets may react to the general election results this year could be very different than a year ago. Last year, the market was expecting a status quo result and a remain win. The leave win surprised traders and sent sterling lower.
The strong performance of the UK economy since the Brexit decision has caused a number of traders to rethink their position. In recent months, moves toward Brexit have been seen as positive by the street and attempts to overturn the referendum or slow progress toward Brexit have been seen as a negative for GBP.
In the early stages of the campaign, when the Conservatives had a big lead in the polls, sterling advanced. The technical tipping point and breakdown coincided with polling that suggested a closer race and the potential the Conservatives could lose seats.
Based on this, a decisive win by the Conservatives would be seen as giving prime minister Theresa May a strong mandate for negotiating with Europe and could spark a rally in the pound.
A poor showing by the Conservatives, leaving them with a slim majority or a minority government, could undermine the government’s negotiating position and knock the pound down moderately, say 1-2 cents.
A Labour win or Labour emerging at the head of an alternate coalition is currently being seen as unlikely. Either of these outcomes would be a big surprise to the markets, not only weakening the country’s hand in negotiations but potentially opening the door to policies that could hurt the UK economy. These low probability outcomes could send the pound hurtling lower.
In addition to GBP/USD, EUR/GBP and GBP/JPY may also be active around the election results. The UK 100 may also be active, most likely trading in the opposite direction to the pound, as it has for the last year.
Heightened market volatility is likely over the election period, which 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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