- GBP/USD has surged as investors have begun pricing in a Conservative victory.
- The UK elections are set to rock cable, with a minor impact from the Fed decision.
- Mid-December's daily chart is pointing to mild overbought conditions.
- The FX Polls is showing experts are split about the pound's reaction to the elections.
Like children who are unable to wait for the presents under the Christmas tree, pound bulls have already front-run the UK elections, responding positively to stable polls. The speculation will shortly be over as Brits head to the polls – and results are due while markets are open. The Fed decision and data may have a minor impact, as well.
This week in GBP/USD: Has Boris already won?
After a string of polls showing a narrowing gap between the Conservatives and Labour, two new ones reflected the Labour's comeback stalled – the gap remains at around ten points. With fewer than ten days to go and no further advance from the opposition, traders have begun assuming the election is over – sending the pound higher.
Investors have a clear preference for the Tories and their business-friendly policies over the opposition's spending and nationalization plans. On Brexit, Labour leader Jeremy Corbyn committed to renegotiating the accord, and bringing it to a referendum with remaining in the EU is on the ballot. While markets desire to cancel Brexit altogether, they prefer the clarity of Johnson's Brexit deal over uncertainty.
The topics leading the UK political agenda also seem to assume victory for the Conservatives. The PM laid down his plans for the first 100 days of his new government, and EU officials began talking about the next phase in Brexit – future arrangements beyond after the transition period end.
Outside the UK election bubble
Sino-American relations have seen another week of ups and downs. President Donald Trump said that he might wait until after the November 2020 elections before proceeding with a deal, and White House officials confirmed that the US is still on track to slap tariffs on China on December 15. Beijing was also angered at a US bill denouncing human rights violations in Xinjiang – following the Hong Kong Act.
However, sources close to the negotiations said the world's largest economies were making progress towards an accord. Markets suffered from mood swings with the dollar mostly struggling.
The greenback also suffered from weak data. ISM Manufacturing Purchasing Managers' Index showed deeper contraction in the industrial sector, and the Non-Manufacturing PMI edged lower but held above 50 – representing slower growth.
The trend was slightly better in the UK, where the Markit/CIPS final manufacturing and services PMIs were upgraded in the ultimate read for November. However, they both remain below 50. In any case, sterling has been ignoring British economic figures and moved only in response to election news.
UK elections are here
Here we are, at the week including the December 12 elections. Johnson warned against "Nightmare on Downing Street" on Friday the 13 if Corbyn becomes PM. It now seems that markets have mostly priced out this option.
What is priced in? A small Conservative majority is probably cooked into cable – yet fewer than 68 seats projected by YouGov's Multilevel Regression Post-stratification (MRP) poll – the broadest statistical exercise leading to the vote.
A hung parliament will likely trigger a sterling sell-off while a broad majority may propel it higher. The picture is more complex, and there may be many twists and turns before markets close.
To gear up for the all-important poll, see
UK Elections Preview: Five scenarios for the vote and potentially wild GBP/USD reactions
Expectations may change toward election day. Additional surveys may further shape expectations but perhaps also confuse. Polling firms may produce contradicting estimates ahead of the vote.
The economic calendar features one significant figure that may play into undecided voters' considerations. Monthly Gross Domestic Product for October is forecast to contract for the third consecutive time. While the UK economy expanded in the third quarter and averted a recession – fears of a downturn may push some voters away from the ruling party.
For markets, the monthly Manufacturing Production figures are of interest but are unlikely to move the pound as they do not have a political impact.
Sterling is set to move around choppily before results are known amid reports about the turnout. A cold spell – which is due to hit the UK on election day – may keep some voters at home, helping the Conservatives. Older voters are usually undeterred and tend to support the Tories. High participation implies more youngsters are coming out to back Corbyn.
High volatility is due when the BBC publishes exit polls at 22:00 GMT and with every real result, starting from Sunderland South at around 23:10 GMT. Every constituency declaration may rock sterling, and a clear picture should be available early in the morning.
The action does not end with the results, as politicians are set to make statements and perhaps offer resignations. And if the Conservatives fail to win a majority, political parties may begin scrambling to form minority governments or coalition.
As mentioned in the preview, the UK counts votes slowly, but politicians cut deals quickly. The action may continue throughout Friday the 13.
Here is the list of UK events from the FXStreet calendar:
US events: Trade, the Fed, and consumer data
The week leading to December 15 – when the US intends to slap new tariffs on China – is critical for reaching a deal or at least another truce. If the world's largest economies shake hands on something, the safe-haven US dollar may decline. And if Washington states it is slapping tariffs on Beijing, the greenback may rise.
Sino-American relations may steal the show from the Federal Reserve.
After cutting rates in the past three meetings, the Fed is set to leave them unchanged. However, investors will look for hints for the next decisions, probably focusing on the Fed's reaction function. Jerome Powell, Chairman of the Federal Reserve, expressed optimism in his last public appearance, but recent figures have been mixed.
See Fed Preview: Is the bar higher for hiking? Powell's may down the dollar, three things to watch
The US releases inflation figures just before the Fed decision. Core Consumer Price Index dropped to 2.3% in October and may cause jitters in the report for November. Monthly Core CPI is set to rise by 0.2%, repeating the previous increase.
The second significant data release is retail sales on Friday. Consumption hs held up the economy in recent months. Moderate rises in October will likely be followed by similar 0.3% to 0.4% increases in most measures in November.
Here the upcoming top US events this week:
GBP/USD Technical Analysis
The Relative Strength Index (RSI) on the daily chart is still marginally above 70 – reflecting overbought conditions and indicating a correction. On the other hand, upside momentum remains robust, and the pair continues trading above the 50, 100, and 200-day Simple Moving Averages. The 50-day SMA recently broke above the 200-day SMA – a Golden Cross pattern.
Resistance awaits at 1.3165, a peak from early December. It is followed by 1.3275, which worked as resistance in late March, and then followed by 1.3380 – the yearly high. The round number of 1.35 is the next level to watch, and it could be hit or breached in case of a landslide victory.
Some support awaits at 1.3110, which was a swing low in early December. 1.3050 held cable down in the spring. Next, October's peak of 1.3013 and November's high of 1.2985 are. Further down, 1.2880 worked as support in late November, and 1.2820 was a stubborn support line beforehand. The November low of 1.2760 is a critical line. Further down, 1.2705 and 1.2655 are eyed before the round level of 1.25.
UK elections are hard to gauge, but among the five scenarios presented in the preview, the most likely one is a small Conservative majority that may lead to a "buy the rumor, sell the fact" reaction.
The FX Poll is showing that experts are undecided about the elections, with a 50-50 split between the bulls and the bears. While the near-term target has been upgraded following the pair's gains, perhaps forecaster may see the currency pair as reaching its limits. Looking forward, the poll is pointing to losses, despite rises in the targets.
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