UK Election: Pound bulls need the Tories' widest possible lead

Just a couple of days ahead of the UK Snap Election, the markets still do not know what to make of the confusing/diverging succession of polls being released. Apparently, Jeremy Corbyn and the Labour party have made it a tighter-than-expected race with PM Theresa May and the Tories, but the outcome to such a particular election is quite uncertain. The GBP has been on a rollercoaster ride while the FTSE keeps making new highs relentlessly. To get a clearer picture of this high-risk event, we've had a nice Q&A with Roberto d'Ambrosio, CEO at Alpari Research & Analysis:  

  • What is the UK Election outcome the markets are pricing in right now on the GBP?

The Pound is reflecting the uncertainty that the polls are forecasting. The lead of the Tories seems to be much narrower than expected and this is not good news for the UK currency, which to my view is pricing in a lead that is not far from 50 seats.

  • Does Theresa May need to achieve a qualified majority for the GBP to be bullish?

The GBP will probably benefit from the widest possible lead by the Tories. Should the election return a narrow lead for the Tories, the uncertainty might weight on the Pound against all other currencies.

  • What kind of effect would a better-than-expected result for Corbyn have on the GBP?

In theory, this outcome should be bearish for the Pound, as the uncertainty that it could sparkle might weight on the coming negotiation for the UK exit from the EU. Should Corbyn come really close though, there could be a chance that Brexit itself could be questioned, and that would probably boost the Pound.

  • How will the Election weigh on the Brexit negotiations?

A strong Tory win would put Theresa May in the position to carry on the negotiation with the EU with fewer concerns and probably be more affective in safeguarding UK interests. If the polls are confirmed and Tories would come out with a weak lead, the internal process regarding Brexit will be harder for Theresa May to carry out, putting the EU in a better position to come out with the upper hand. In the unlikely event of Corbyn coming out as the winner, the whole process itself will probably be reviewed, up to a possible complete revision of it.

  • How big is the possibility of another GBP flash crash heading into the UK Election?

I might expect short-term volatility, but I guess that lesson has been learned and I would see the possibility of a flash crash as unlikely. Of course, the short-term volatility suggests cautiousness in trimming the exposure to the Pound in the immediate aftermath of the voting, as the first results will be made public.

  • Is the GBP the most vulnerable currency to political events?

All currency are affected by political events. We had an example with the EUR during the French Election saga.

On the weekend of the first round of the French election, the EUR considerably gapped against all currencies.

Of course, the Pound is now in the spotlight, but even the EUR could be impacted in case of a very tight result, let alone the unlikely event of a Corbyn win.

  • Which are the key technical lines in the sand for the GBPUSD in the mid-term?

In the short-term I would say 1.30 on the upside and 1.2680 on the downside.

On the mid-term, only the Pound regaining 1.35 would be a real bullish signal.

  • Which tools should traders use to track UK political risk ahead of the Election? FTSE? Gilt bonds? Polls?

Polls will impact for sure in the short term, but Gilt would be a very good indicator of the market sentiment towards the impact of the elections on the UK economy. Yields were contracting lately as a consequence of the economic data that pushed the FTSE to record highs. Should the yield widen, that might signal that the expectations for the economy are not as optimistic and that would immediately reflect on the currency.

  • Will the election have any effect on the BoE policy?

I do not think so. If the election will return a less than 40 seats lead for the Tories, pressure will come on the Gilt yields and I do not think that the Central Bank would add to that pressure.

  • Is the GBP Brexit-imported inflation sustainable with no change in the BoE stance?

The economic data have come out strong so far and the Brexit impact is still to be seen. I think that the imported inflation is a serious matter to be taken care of, but the impact is somewhat limited, and will ease should the Pound gain ground should the lection restore confidence on political stability. BoE will probably then wait for the short-term noise to vanish before reconsidering its stance.

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