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UK General Election 2019 – How Will the Markets React?

jeffriess
December 9, 2019
by Joseph Jeffriess, Market Analyst

Article Recap

This week focus moves to the UK General Election which will be held this Thursday 12th December. Depending on the outcome, GBP/USD, EUR/GBP and The FTSE could all see significant shifts in price.

Britain heads to the polls for the third time in less than five years on Thursday, and with Brexit still regularly dominating the UK news cycle, it’s shaping up to be a key influencer in this week’s outcome. The current exit date for the country’s departure from the EU stands on 31st January 2020, and the hope is that Friday’s result will help break the political deadlock surrounding the terms of that departure.

At the moment, the two key parties within the UK, the Conservatives and Labour hold the greatest leads in the polls. The Conservatives are currently polling at 43% while Labour currently stands at 33%.

Polls UK P1
The Guardian

 

BREXIT STANCE OF BOTH PARTIES

We know what current Prime Minister and Conservative leader Boris Johnson stands for regarding Brexit – he has been part of the Leave camp since the shock of the 2016 referendum that saw the British people choose to leave the EU. Since then, former leader Theresa May has come and gone due to the inability to pass Brexit through UK Parliament and Johnson has picked up where May left off, being blocked and held back on getting a deal through while attacking Parliament for delaying and denying the exit process.

The Labour party led by Jeremy Corbyn goes into the election with a plan to get Brexit sorted in six months. This by the sounds of it includes a new referendum. The Labour leader will stay neutral on the Brexit front and put it to the people with a “credible leave option” and an option to remain. Experts predict it would take 22 weeks to organise a new referendum.

 

LATEST POUND SENTIMENT

GBP was pro-Conservative party last week – as their lead in the various polls has grown, so has the value of GBP against most currencies. For now, traders see a Conservative win and overall majority as a stable and a smooth way to achieve Brexit. GBP/USD gained 1.76% last week, mainly buoyed by the news of a Conservative lead. Even Friday’s strong USD move, after much stronger than expected payroll data, did little to dampen the GBP/USD weekly rally.

Going off the above you would think a Conservative win should be great for the GBP, but a minority Government or a hung parliament could cause some fireworks for the currency. A Labour win could also reignite fears of the unknown and destabilise GBP, due to the prospect of a second referendum and a possible remain win. These are all points traders could start thinking about concerning GBP ahead of the end of the week.

We’re going to look at three main markets, GBP/USD, EUR/GBP and the FTSE on a technical and fundamental view, through the proposed individual election scenarios.

 

GBP/USD – Weekly

A Conservative win – we would be looking for the current fast trend to continue with a possible bullish extension to test the main resistance. A Brexit deal would also come into play here, helping the trend or flattening it depending on the final details. Overall GBP/USD remains in a solid place now, following the buyer-led trend break back in October.

A Labour win – we would think in the short-term, a Labour majority would send shock waves through buyer confidence, bringing back a level of uncertainty. If this was the case, we would be looking for a sharp decline breaking the current fast trend and if seller momentum was extremely strong, possibly setting up a move to test the 1.2750 area. The hard part of this outcome is the longer-term effect. The initial fear could turn bullish if Labour’s plan for the exit is seen as negative by the GBP.

GBPUSD.iWeekly

 

EUR/GBP – Weekly

Conservative party win – we would be looking for the current long-term downtrend to continue with a possible new extension to test the .8350 area. This area of .8350 to .8308 hasn’t been tested since the Brexit referendum (2016) – a move back to or through those lows would be very substantial.

Labour party win – selling could see a stall, with GBP uncertainty possibly leading to a strong reversal in EUR moving back above last week’s support break. As noted above, longer-term seller strength could be hard to gauge due to what type of exit plan comes out after a 2nd referendum.

EURGBP.iWeekly

 

FTSE (UK100) – Weekly

The FTSE to me is slightly harder to look at, as other factors have been playing a role in its direction recently. Looking at last week’s trade, we saw a 2.97% drop at one stage, before a 1.27% rally developed at the end of the week. The trade war and global growth worries continue to be key influences for not only the FTSE but other major stock indices.

Conservative party win – As with GBP, we would see this as a more positive influence on the short-term due to proposed stability. But last week didn’t support this as stocks fell despite a higher GBP on a Conservative lead. Longer-term influences including how and when the UK exit the EU will play a factor – will it be easier on business in the UK post-Brexit with company profits improving? What will be the new trade rules, if any, with the EU?

Labour party win – on the short-term we would think this would have a negative influence due to proposed uncertainty. Could a second referendum with a choice between a clearer Brexit or a option to remain offset those short-term fears?

Looking at the current weekly UK100 chart, we can see price remains in a consolidation after breaking a mid-term uptrend. Despite last week’s volatility, the price remains between 7440 and 7140. While 7140 remains in play, we would be looking for the current consolidation to hold. A break above 7381 starts to show buyers have control and a break of 7446 suggests a new extension higher is underway.

UK100Weekly

 

Based on the above there are still a lot of doubts and reservations regardless of who wins on Thursday. We still need to see a clear deal done with the EU to finalise a British exit and if there’s not a going to be a second referendum, then the timescales of such a deal are currently set to be implemented by the end of next year. There are other issues as well; could there be a winner with no majority? We saw how hard it was for both May and Johnson to operate without a significant parliamentary majority when trying to get Brexit plans voted through. A hung parliament will only prolong further UK uncertainty.

We’re looking forward to Thursday’s election result and how it is going to shape the future of the UK, Brexit and to some degree the future of the EU itself.

 

Sources; The Guardian – The Independent – BBC News

Good trading from Eightcap.
All times are AEDT.