Election news gave GBP a boost – but can it last?
UK Prime Minister Theresa May gave GBP a mighty boost when she called a snap election to be held on June 8, but whether this is just a temporary bounce or the start of a more sustained recovery depends on why forex participants bought GBP on the announcement.
GBP/USD could be on course to challenge 1.3000, but whether it does so, depends on several key factors.
One theory behind the GBP bounce is because the markets believe that PM May will massively boost her majority allowing her to ignore hardliners in her party who want a complete break with the EU i.e. she will be able to negotiate a softer Brexit.
There are several problems with this theory. May has set some red lines such as restricting freedom of movement of people and not being subject to the European Court of Justice – all EU sacred cows. This suggests a harder Brexit, especially as it is the EU that will decide what access the UK will have to its markets and its leaders have stated many times that it cannot be as good as being part of the club.
However, if this is the main reason GBP rebounded – then it is more likely to be temporary.
The other theory, which is more credible, is that a much-strengthened May equals greater political stability. For a start, it will push the next general election back to 2022 rather than 2020. Brexit is due to take place around April 2019 and it will give a stronger government a better chance to deal with the impact.
Now for the risks …
The election should be a cake walk for May as she is miles ahead in the polls and her opposition is considerably weakened. Some pundits think the Conservatives could emerge with a working majority of as much as 150 compared with the current 17.
Despite the commanding lead, this election isn’t without its risks for the government. The opposition parties could put up a stronger fight than expected and though they’re unlikely to win, it could mean the Conservative majority ends up being a lot smaller than expected – possibly closer to 50 or even less. Elections are unpredictable, scandals can break, opponents can strike a chord with voters or the economy could start deteriorating. If a week is a long time in politics, then the six weeks to the election are an eternity!
Therefore, GBP could become quite volatile again swinging back and forth on opinion polls as it did in the run up to Brexit referendum and some politicians will treat this election as a second referendum, so expect plenty of exaggeration and noise from both sides.
However, for the next few weeks at least the election in France is likely to garner the most attention from the rest of the world with its implications for the continued existence of the EU.
TECHNICAL ANALYSIS: Election news has put GBP/USD in an uptrend
The UK election announcement gave GBP/USD a very nice boost last week, and from a technical perspective at least, has firmly set sterling on an uptrend with it having hit its highest levels since October 2016.
For the moment, the pair seem to be in a holding pattern with direction in large part to be decided by politics and opinion polls of which there will be many in the run up to the June 8 election date. In the meantime, a period of consolidation seems due with the daily RSI near overbought and with pair having significantly pierced the upper Bollinger band, which is usually followed by a pull-back or a short period of consolidation.
Resistance levels can be seen at 1.2910, 1.2919, 1.2965-7 and 1.2990 with support pegged around 1.2746, 1.2658 and 1.2556.