GBP/USD bulls cautiously stacking up their chips for a Tory victory before the shake-out

  • GBP/USD is elevated on the premise of a Tory UK election victory.
  • Less committed bulls may sell-out ahead of the result. 
  • Bulls cautioned over a 'buy the rumour sell the fact' risk.
  • BoE and Fed are also in focus, US dollar strength to cap cable rallies. 

GBP/USD is trading with a bullish bias as we head towards the UK elections on Thursday and results that will be released early-doors Friday morning. GBP/USD is currently trading bid, +0.36%, having travelled from a low of 1.3132 to a high of 1.3189. 

Indeed, the Tories are set to win the UK election which will likely put the Brexit deal to bed, thus encouraging markets to begin to focus once again on the UK economy. Today's UK data events took a backseat to the election hype despite a flat reading for Gross Domestic Produce for the month of October. The GDP reading has followed two consecutive monthly contractions –  which means we have now seen three straight months of negative/zero m/m growth for the first time since 2009.

In the same vein, after this week's general election, the next hurdle for UK markets is next week's Bank of England decision. However, with UK data continuing to surprise to the downside consistently since the last BoE meeting, we might still need to wait for further post-Brexit evidence before the Monetary Policy Committee will show their hand.

Meanwhile, staying with UK elections, for now, pent-up demand could see the pound rally towards 1.34 handle, (breaking 1.3380 resistance on the way there), in line with the late October daily ATR of around 150 pips. However, bulls may hesitate to get too long of the pound considering there is still a long way to go in European politics before we will have some meaningful traction. For instance, despite a Tory victory, there is going to be a long road of negotiations ahead during the transition period.

Moreover, no matter if the Tories do win convincingly, we have a 'sell-the-fact' profit-taking risk to consider – speculative long positions have accumulated into the build-up to the event. Committed bulls will likely want to see cable pop higher once the result is known before the shakeout of stale longs, although, leading into the event, the less committed bulls will likely start to cash in. 

FOMC now in focus

In the immediate future, we have the Federal Open Market Committee and the Federal Reserve's subsequent interest rate decision. Rates are expected to remain steady at 1.50-1.75% while a 'patience' rhetoric will emulate prior Fed speeches and statements filled with preconditions before easing again in the future. Therefore, the US dollar can likely continue to perform and be an additional roadblock for eager cable bulls. "We don't anticipate any dissents next week for the first time since May. Statement and dot-plot shifts are well anticipated," analysts at TD Securities argued, adding:

"A propensity to compel major FX shift is low at this time of year. Powell's tone in the press conference should diverge from a cautious ECB (the next day), and should modestly support the USD."

GBP/USD levels

  • Bullish targets: 1.3160/87 being tested, 1.3380 comes next ahead of 1.3850.
  • Bearish targets: 1.3013, 1.2930, 1.2768.

Depending on what goes down in UK politics for the week ahead, the technical areas are well mapped, with bullish targets set on a firm break above the 50% mean reversion of the mid April-3rd September range in the 1.3160s and a five-year downtrend with a confluence of the 200-week moving average. 1.3187 May high reinforces the said resistance

– Chart of the week: GBP/USD bulls target closes above critical 1.3160/90 on UK election week

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