GBP/USD: bearish neutral but bullish on a Conservative victory

Currently, GBP/USD is trading at 1.2891, down -0.11% on the day, having posted a daily high at 1.2952 and low at 1.2872.

GBP/USD is a fade back below the 1.29 handle. Sterling remains vulnerable leading up to the UK elections this week, but as can be listened to below, the general consensus is that the conservatives will take up more seats comfortably.

However, there are a number of factors one needs to consider in the lead up to the elections as to whether Labour could actually win. These were discussed in today's panel that can be watched in full below and ranged from variables such as the weather, (flooding in the UK harmed the participation rate during the EU elections) to demographics, (18-24 years olds registered in record numbers). However, as concluded in today's panel, a Labour victory is highly unlikely, no matter the weather! They are simply far too many seats behind in the house of commons and none of the polls points to a labour victory. A more likely scenario is a hung parliament and that is certainly a risk to the pound. 

We highlighted a number of scenarios of potential outcomes from the elections as follows:

Conservative victory with Absolute Majority (Scenario 1)

 A Conservative victory with an absolute majority should be supportive initially for the pound. Stock markets would be relieved on the lower corporation tax outlook and a risk-on environment could be the expected outcome. However, with a focus on Brexit and PM May's hardline - "No deal is better than a bad deal" - approach to the negotiations, a hard Brexit outlook could equate to a bearish scenario to the pound eventually - (Note: Remain cautious of a 'buy the rumour sell the fact' trade - a Conservative victory is virtually priced in).

 Conservative victory without Absolute Majority (Scenario 2)

With the narrowing of the polls and a trend that has been continuing, the possibility of a hung parliament should not be ruled out, (When no party has won enough seats to have a majority in the House of Commons). Such an outcome could be highly bearish for the pound due to the uncertainty for markets to deal with. However, in a hung parliament, the incumbent prime minister stays in office until it is decided who will attempt to form a new government - this could support the pound after an initial sell-off. (Note: A hung parliament does NOT necessarily mean a coalition government).

 Laborist victory (Scenario 3)

A balanced outcome for the pound with initial volatility on the basis of Labour’s manifesto. Initially, a lower pound could be the immediate outcome bias due to increased uncertainty and a reduction of inflows. However, a Labour victory should mean a softer Brexit outlook and austerity would be removed, (Fiscal easing lifting growth and inflation expectations). Higher real yields may offset the initial weakness in the pound.

GBP/USD levels

GBP/USD is neutral to negative very near term according to analysts at Commerzbank who noted that the market sold off to and is seeing a small rebound from the 1.2776 December high. "Rebounds are indicated to terminate circa the minor resistance line (1.2939) ahead of losses to 1.2603/1.2585, the 100 and 200 day ma and the 1.2366 the 10th April low."

UK Panel in full:

Labour unlikely to win no matter the London weather