Following an unexpectedly strong win from the Conservatives the pound soared over 2%, piercing $1.35 overnight. The 80-seat majority secured by Boris Johnson will bring an end to the political gridlock that has paralysed Parliament since Theresa May lost her working majority in 2017. For Brexit, the result will almost certainly mean that the UK will leave the EU on 31st January with a deal in place.
However, this is by no means the end of the road for pound volatility and risk events. We expect pound volatility to quieten down now and across the holiday period. However, in the new year, once the Withdrawal Bill has been ratified, pound traders will quickly turn their attention to the transition period, which is to last until the end of 2020. This means that Boris Johnson has just one year to arrange the trade deals, an ambitious plan.
The clear majority that Boris Johnson achieved could give him more scope for getting an extension to the transition period agreed to. He would no longer be so dependent on the hard-line Brexiters and European Research Group. However, there is also the risk that Boris Johnson won’t want to extend the transition period given that his moto was “get Brexit done” and with such a solid majority he has a clear mandate to do just that.
Until we get further clarity on the transition period, the pound might struggle to advance beyond $1.35 in the short term. The start of H1 could still see considerable uncertainty.
GBP/USD hit its highest level since June 2019 overnight. However, profit taking across the session has seen GBP/USD drift back to support at US$1.3340.
Further support can be seen at US$1.33 $1.3250.
On the upside resistance can be seen at $1.3420, $1.3465, $1.3515.
US dollar & Trade
Whilst there will be a pause in UK political and Brexit headlines for the coming weeks, US – China trade could dominate. The US and China have both now confirmed an interim trade deal which involves the gradual reduction of tariffs. The dollar’s reaction has been mixed.
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