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UK Election update - GBP traders sense a sizeable Tory majority

Chris Weston
Head of Research
28 Nov 2019
As election fever hits the UK our flow in GBP, and to a lesser extent UK100, has certainly perked up, and so has the love for UK assets, where GBP is finding buyers easy to come from market participants. I flag several set-ups below, but the question now is whether to chase the GBP higher here. I am reluctant to do so and would be using weakness for entry points

Johnson’s election to lose

We're two weeks from the UK election and the market has come to the view that this is now Johnson’s election to lose. Betting sites have the Tories getting some 352 seats; 32 seats more than the 320 seats needed for a majority. Consider there are around 30 seats which are expected to go to a Conservative MP but have less than a 5% margin of victory, and this could influence the extent of the Tory victory. As would the undecided voter.

Last night’s highly anticipated YouGov MRP poll detailed that the Tories are on track to take 359 seats, which, would be a gain of 42 seats on the 2017 election. This methodology (https://www.survation.com/what-is-mrp/) predicted Theresa May would lose her majority in 2017, so it has been a useful source for election strategists. Either way, the market has a strong Tory majority in the price, which could offer a degree of certainty as the markets like stable government.

A strong majority will also help Johnson in the next stage of Brexit – the Transition Period and it is inevitable that we will have to see a multi-year extension being requested from mid-2020. A weak majority puts this request into question.

How can Labour claw back lost ground?

With the YouGuv poll putting Labour on 211 seats, another factor getting some consideration is how Labour close this gap, when they have already released their manifesto and are embroiled in anti-Semitism headlines. Many also question Corbyn’s ability to pay for his spending plans without blowing out the UK’s already sizeable deficit. Certainly, the Lib Dems will be disappointed to be getting no traction at all and their polling seemingly peaked in September.

Perhaps we could see modest convergence in the polls through next week, as it seems logical that there will be intense focus on Trump’s visit to London next week (2-4 December), with Corbyn likely to push the notion of the Tories selling out the NHS to the Americans, as and when we see the UK pass the Transition Period and look to forge trade deals ex-Europe.

If we think GBP has rallied on the idea of a strong Tory majority, we must believe this anticipated large majority is mostly baked in and any further polling which maintains this strong position is less likely to positively impact the GBP from here. That said, should any of polls call this margin into question, where invariably there will be one or two, then GBP could see a sharp sell-off, although I would be using that weakness to buy.

Is two weeks a long time in an election countdown? I guess it is, but Corbyn is going to have to pull a rather large rabbit out of a hat to narrow this lead.

Set-ups on the radar

GBPJPY has been one of the favoured positions from clients, and that exposure is progressive being traded from the short side. Tactically, I am neutral here, but price action is key, and a bullish breakout is one I will respect.

GBPJPY daily chart

GBPAUD has had a huge move from the July lows, tracking to the highest levels since 2016. However, having broken above the consolidation high, we are seeing sellers kick in and the candle is shaping up to print a pinbar reversal on the daily. It's hard to be bullish AUD, although AUDUSD is holding the 14 November low of 0.6769 and should buyers push this pair higher we should see GBPAUD downside.

Hard to be bullish until we see a close through 1.9093.

GBPAUD daily chart

GBPCAD – sellers are in here, and price has failed to build on the bullish momentum seen since the reversal on 27 November. I have this on the 4hr chart, as it best shows how price has reacted to the move through the double bottom neckline.

GBPCAD daily chart

UK100 - clearly the underperformer YTD in developed equity markets, but that could change if we see a closing break of 7440. Happy to turn bullish, and wade into longs on this development.

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