Sterling braces for Thursday UK election

On Wednesday, as the US dollar prepared for a key political event in the form of potentially market-moving testimony by former FBI Director James Comey regarding his past interactions with President Trump, the British pound braced for the highly uncertain outcome of Thursday’s general election in the UK. In the weeks running up to the election, sterling has been pressured against a strengthening yen and euro, but has held its own against a struggling US dollar. Thursday’s UK election and Comey testimony are set to produce substantially heightened volatility for GBP/USD as outcomes emerge.

Poll Standings

There is a lot of scope for sterling movement depending on the outcome of tomorrow’s election. According to recent polling, the race has tightened considerably between the leading Conservative Party and the closely-trailing Labour Party. From around a 20-point lead in late April, shortly after Theresa May called for snap elections, the average of major polls has dwindled to less than 6 points. But some individual polls have shown a much tighter gap – with one showing just around a 1-point lead for Conservatives over Labour.

Potential Impact on Sterling

Generally, a Conservative victory on Thursday would be seen as positive for the pound as it would signal a potentially smoother, less contentious Brexit process going forward, as well as a more business-friendly government. But even with a Conservative victory, the margin of victory will be critical, as a larger majority and number of seats in Parliament should pave the way for easier Brexit negotiations with the EU, while a tighter margin could stoke fears of ongoing conflict between Theresa May and Brexit hardliners within the UK government. Other possibilities, albeit much less likely, are either a hung parliament potentially leading to a multi-party coalition government, or an outright victory by the Labour Party.

Here is a summary of the primary possible outcomes and their potential impacts on the pound:

• If UK Prime Minister Theresa May’s Conservative Party wins by a large margin, the pound should see a strong boost as Brexit-driven conflict within the government would likely be ameliorated.
• If Conservatives win by a small margin, the impact could be neutral to somewhat negative, as the status quo will not have been materially altered but disappointment that May will have failed to secure a strong mandate could pressure sterling.
• If a hung Parliament results, which should lead to a multi-party coalition government, the sheer uncertainty produced by this outcome could weigh very heavily on the pound.
• In the unlikely event that Labour is victorious, the immediate impact on the pound should also be negative due to the many uncertainties that would arise surrounding Brexit negotiations going forward.

The Technicals

From a technical perspective, GBP/USD has been following a generally bullish trend since its mid-March lows. The largest boost for the currency pair occurred in April, after Theresa May initially called for snap elections and Conservatives were far ahead in polling. Late May and early June have seen a steady rise for GBP/USD along the bullish trend line, but much of this rise has been due to a falling US dollar. Currently, the pair has once again approached major psychological resistance around the 1.3000 level, which was reached and slightly breached in May before a sharp pullback. A key technical event to watch for would be any strong re-break above 1.3000 on an election-driven boost for the pound, in which case a key near-term upside target is around the 1.3250 price region. If GBP/USD fails to break above 1.3000 and instead breaks down below the noted uptrend line on a surprise pound-negative election outcome, key short-term downside targets are at the 1.2800 and 1.2600 support levels.