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Pound Not Sold on Early Elections in the UK

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April 25, 2017 By: , No Comments

GBP Juiced Up by Prime Minister Theresa May

Prime Minister Theresa May has been coming under increasing pressure in Brexit negotiations of late. To strengthen her hand, she’s looking to increase her party’s support in the House of Commons by calling for a snap election on June 8, 2017. The GBP, and indeed the UK economy overall, is balanced on a knife edge. Typically, surprise announcements such as an unexpected election would have a negative effect on a currency. But that’s not the case for the GBP because traders are looking at this election as an opportunity to strengthen the UK’s negotiating position to achieve a much better deal post-Brexit.

The International Monetary Fund (IMF) upgraded UK economic performance to reflect 2% growth in 2017. This is half a percentage point greater than the prior forecast. Recall that in March 2017 Prime Minister May invoked Article 50 of the Lisbon Treaty. This set in motion a 2-year extrication process from the European Union.

 

Hard Brexit vs. Soft Brexit

However, without a blueprint in mind there is no way to guarantee a favourable outcome, especially with all the infighting between opposition parties and the government. If the political pundits are correct, Prime Minister May will gain considerable clout after the next election. This will strengthen the government’s ruling hand during the negotiations process. It is being perceived as a mandate by the British people to govern more effectively.

For this reason, the GBP/USD pair rallied towards 1.29 before it pulled back to its current level of 1.2775. It is noteworthy to mention that the GBP/USD pair has appreciated by approximately 3.5% for the year to date. If Prime Minister May can strengthen her position, the likelihood of a hard Brexit will be avoided. Naturally, the preferred outcome is a soft Brexit, with negotiated outcomes.

 

Is the Recent Bullish Performance of the GBP Sustainable?

Spread betting experts caution that the GBP could move in the opposite direction if opinion polls tend to suggest that support is waning for the conservatives. There are other issues that could derail the performance of the GBP, notably poor retail sales or other economic indicators. Markets tend to react negatively to unexpected political outcomes such as election results. As we already saw during the first stage of the French presidential election, Macron and Le Pen pulled through. This means that they will face off against one another on May 7 for the French presidency.

The FTSE 100 index recently rallied after the populist right wing leader Le Pen came second in the first round of presidential elections. Markets are factoring in victory for the centrist over his nationalist opponent. The CAC, DAX and FTSE are on the up and up. In the UK, Standard Chartered Bank rose by 4.3%, while Barclays PLC gained 5%, helping to drive up the all share UK index. The reason banking shares are performing strongly is that the risk of capital outflows is diminished. The EUR appears to be structurally sound, if Macron can hold on to his position.

As for the future of the GBP, the Commodity Futures Trading Commission reports that there is a long-term net short position of 99,490 contracts. For the week ending April 18, 2017, there were 16,477 long positions on GBP futures and 10,066 short positions on GBP futures.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.

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