Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
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UK's political gambles are weighing heavily on GBP

There has been good cause to be cautious about GBP with UK Prime Minister Theresa May potentially adding more reasons to shun sterling as she may have now entrenched years of political uncertainty.

Where GBP goes from here is unusually hard to predict as the spectrum of political outcomes over the next two years following last week's general election have quite literally proliferated. These range from being bad for GBP through to potentially supportive. Visiting levels of GBP/USD 1.2000-1.2500 sometime this year are now distinctly possible.

UK's political gambles are weighing heavily on GBP

May is the second Conservative Prime Minister to take a big political gamble following David Cameron's bid with the UK referendum to stay in the EU in June 2016, designed to quell the forces of Euroscepticism in his party, which he lost.

Following very positive opinion polls, May was hoping to significantly increase her parliamentary majority, cement her power base and buy herself more time to deal with the aftermath of the UK leaving the EU on March 29, 2019. That gamble has failed leaving the UK with a hung parliament.

Following very positive opinion polls, May was hoping to significantly increase her parliamentary majority, cement her power base and buy herself more time to deal with the aftermath of the UK leaving the EU on March 29, 2019. That gamble has failed leaving the UK with a hung parliament.

That’s because over the next two years, the EU could end up engaging with a procession of different UK negotiating teams each with different styles and priorities. Why? Because this time next year, May probably won't be Prime Minister after her electoral blunder. She might be replaced with someone with a different agenda. Within two years or less, the Conservatives may not be able to govern, leading to another general election, which they may lose ushering in the Labour party or some sort of coalition with a different outlook and demands. This makes even settling technical questions over the UK’s EU departure, such as the exit fee, much more challenging, never mind negotiating transition arrangements or even a trade deal.

In the meantime, May's weakened government will now be more hostage to the more extreme parliamentary political wings, whether it be fanatical Brexiters or extreme Europhiles, each threatening to torpedo any agreement that doesn't fit their demands.

Unless political stability is re-established soon – an unlikely event – then the outlook for GBP has likely darkened whilst political uncertainty has ratcheted up dramatically. By this time next year, the UK’s political landscape, economic policies and Brexit stance could all be quite different to what they were last week. This hardly imbues much confidence in GBP.

 

TECHNICAL ANALYSIS: GBP/USD: rally in doubt

From January onwards, GBP was quite nicely working its way higher as the economy was doing better than expected and there appeared to be a safe pair of hands in government steering the country. By June 9 that all changed following the results of the UK election. That six-month rally is now in doubt. News of the hung parliament saw GBP gap down to hit a low of 1.2635 before recovering to 1.2747 late Friday.

Providing the political situation stabilises, GBP/ USD could establish some poise over the coming days with the pair having punctured the lower Bollinger band, and extensive periods of volatility are usually followed by periods of calm. If GBP/USD can stay above 1.2700, the recent rally – from a technical perspective – may not be over.

Support for GBP/USD can be seen around 1.2700, 1.2663-5, 1.2635 and 1.2564. Resistance is pegged around 1.2790, 1.2805-9, 1.2828 and 1.2842.

 

By Justin Pugsley, Markets Analyst, MahiFX

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