BLOG | June 08, 2017

U.K Election and Pound Crosses: Trading Opportunities

On April 18th, U.K. Prime Minister Theresa May called for a General Election–three years ahead of schedule–for this Thursday, June 8th. The general election allows the British public to vote for local representatives (a member of Parliament or MP) and the leader of the party with the most MPs is asked by the Queen to be the Prime Minister.  According to reports by The New York Times and The Guardian, May sought the expedited election to solidify her Conservative Party majority in Parliament, so as to complete Britain’s ‘Article 50’ negotiations (within the two years required by the Lisbon Treaty) for exiting the European Union.

Because May’s Conservatives have a significant lead in the pre-election polls, some believe her call for an expedited election was attempt to further entrench her party’s agenda, set forth in its ‘manifesto,’ which itself calls for ‘sound money’ (a balanced budget), keeping taxes as low as possible, and increasing free trade. Whereas, the lead opposition Labor Party Manifesto calls for tax increases to support infrastructure investment, pioneering a public-private ‘National Investment Bank,’ and substantially increasing government ownership of several private assets (including rail systems, energy supply networks, and the mail).

While Labor Party leader Jeremy Corbyn has signaled his support for Brexit, the Labor Manifesto also clearly forges a different pathway that May’s Conservatives for the negotiated departure from the European Union, scheduled to occur on May 19, 2019. Current polls (June 4th) give the Conservatives a declining 8% edge over Labour.

Image courtesy of  The Telegraph.

I am not a ‘fundamental trader,’ but instead, a technical trader, which means that I believe fundamental events fulfill technical expectations. Yet, the markets will do what the markets will do; to wit, the widespread economic policy judgment by many pundits in the United States was that a Trump 2016 Presidential Election win would be bad for the U.S. Dollar, on the theory that his apparently protectionist trade policies would weigh down the Greenback. While the Dollar is currently retracing off of it’s January 2017 high of 12635, it remains in an Up Push Zone, with the technical expectation that it will head north to the D Extension (even if the inner trendline break gives us reason to anticipate that it will continue to retrace, perhaps to the .382 at 11471).

The point is that when the politicos and economic wonks predict correlations between fundamental events as comprehensive as the ‘Trump Presidency,’ to imply market direction, they are often wrong. So it could be with my prediction regarding the U.K. General Election. My own view is that the Conservatives will win the General Election, but that this will not be the boom May had hoped, because Labor is closing the gap, and that could mean a bullish win for the Pound crosses. I believe a Conservative win is bullish for Pound Crosses primarily because it portends certainty for the market in as much as it represents solidifying the current agenda and approach toward the trajectory of Brexit. Whereas, a Labour win would create uncertainty because Corbyn’s Manifesto explicitly articulates an alternative pathway for negotiation the U.K.’s separation from the European Union over the next two years. 

You can see from the below chart, which maps the U.K. General Elections from 1992 to Present, we can derive some insights. The Pound Sterling has a tendency to lose ground against the Greenback prior to elections, and then gain significant ground afterward. Prime Minister Gordon Brown’s election contradicts this trend, in part perhaps because Brown was perceived as sympathetic to British participation in the Eurozone, but then was instrumental in keeping Britain out of the Eurozone–which was bullish for the Pound.

GBP forex UK election chart

It also helps that a quick examination of the Monthly timeframes all of the Pound Crosses provides the technical expectation that these pairs are all in a DOWN A/B, as follows:

  • GBPAUD: 90/10 Down Retracement Zone
  • GBPCAD: 90/10 Down Retracement Zone
  • EURGBP: 80/20 Down Push Zone
  • GBPJPY:  90/10 Down Retracement Zone
  • GBPNZD: 90/10 Down Retracement Zone
  • GBPUSD: 90/10 Down Retracement Zone

pound cross uk election forex

So, as you look to the lower time frames, you may want to consider trading in the direction of the trend on the Monthly time frames.

U.K Election and Pound Crosses: Trading Opportunities
Article Name
U.K Election and Pound Crosses: Trading Opportunities
Rick Quinn analyzes the volatility many investors are expecting in the UK's snap election using historical data and past market movements in similar situations.
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Forex Tips
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