Currently, GBP/USD is trading at 1.2958, up 0.03% on the day, having posted a daily high at 1.2969 and low at 1.2956.
GBP/USD has offered good two-way business on the back of polls and within volatile markets ahead of tomorrow’s major risk events. Not only are the UK elections on the cards, but we have Comey’s testimony (opening statement already released) and the ECB. The dollar caught a bid on the release of Comey’s opening statement that didn’t give markets anything new to go on and was taken as a positive.
Meanwhile, the conservatives look set to win with a clear majority with recent polls, some of the last coming through now, that have widened in favour of the Conservatives. Sterling is supported at 1.2950, close to the o/n high of 1.2967. FXStreet highlighted three outcomes for the various scenarios as follows:
Conservative victory with Absolute Majority (Scenario 1)
A Conservative victory with an absolute majority should be supportive initially for the pound. Stock markets would be relieved on the lower corporation tax outlook and a risk-on environment could be the expected outcome. However, with a focus on Brexit and PM May’s hardline – “No deal is better than a bad deal” – approach to the negotiations, a hard Brexit outlook could equate to a bearish scenario to the pound eventually – (Note: Remain cautious of a ‘buy the rumour sell the fact’ trade – a Conservative victory is virtually priced in).
Conservative victory without Absolute Majority (Scenario 2)
With the narrowing of the polls and a trend that has been continuing, the possibility of a hung parliament should not be ruled out, (When no party has won enough seats to have a majority in the House of Commons). Such an outcome could be highly bearish for the pound due to the uncertainty for markets to deal with. However, in a hung parliament, the incumbent prime minister stays in office until it is decided who will attempt to form a new government – this could support the pound after an initial sell-off. (Note: A hung parliament does NOT necessarily mean a coalition government).
Laborist victory (Scenario 3)
A balanced outcome for the pound with initial volatility on the basis of Labour’s manifesto. Initially, a lower pound could be the immediate outcome bias due to increased uncertainty and a reduction of inflows. However, a Labour victory should mean a softer Brexit outlook and austerity would be removed, (Fiscal easing lifting growth and inflation expectations). Higher real yields may offset the initial weakness in the pound.
Valeria Bednarik, chief analyst at FXStreet explained that GBP/USD’s upside is favored, although selling interest is aligned around 1.3000, the level to break to confirm further gains. “The pair needs to end the day below 1.2756 tomorrow, the lowest since PM May announced the snap election, to enter in a bearish market, and extended its decline after the dust settles.”
The key levels for the election results on the wide are 1.3040 recent high, 1.3122, 26th June low (post EU referendum immediate low), 1.3270, 1.3374 and 1.3429. To the downside, 1.2840, 1.2780, (post EU ref low) 1.2750 and 1.2600.