Originally published by AxiTrader
Are we there yet?
What was supposed to be a cake walk for Theresa May and her conservative party when Mrs May announced the snap election on April 18 has turned into a much tighter race for the prime ministership of the UK. which is at best much tighter than almost anyone expected and at worst a hung parliament.
Depending on which poll you believe the Conservatives lead Labour by as little as 1% or as much as 7%, perhaps more. Somewhere in that range is the potential for a hung parliament or a comfortable - but likely disappointing - majority of 60-65 seats in the Commons.
With the pound up at 1.29 against the US dollar and the FTSE near record highs sitting at 7,524 today it's easy to think that markets don't appear too fussed by the outcome, whichever way it goes.
Indeed GBP/USD rallied three and half big figures to a high of 1.2905 on the day the election was announced. and EUR/GBP fell the best part of 2 big figures to 0.8312.
But since then EUR/GBP has rallied as the pound has been stuck below recent highs at 1.3050 while euro rallied up toward US presidential election night highs.
That's a really important and interesting "tell" as to what traders might actually think about the election and its risks. The pound's underperformance to the euro in the recent environment also naturally reflects the weaker dataflow, much weaker, coming out of the UK recently relative to the EU. It likely also reflects current market expectations that the ECB might be a little less dovish than recently in the outlook for monetary policy.
But the rally in EUR/GBP (which is inverted in the chart above to highlight the pounds fall versus the euro) suggests that Sterling might actually rally if the election delivers certainty.
That is not a hung parliament. But a clear victory to either the Conservatives or in the unlikely event, Labour.
Looking at the chart of GBP/USD it's clear the old trend line is acting as resistance right now. Once the election is out of the way and we get a clear indication of who is likely to form government and how big the majority is going to be after lunch in Asia Friday this level will remain important but it is the 1.3050/60 region - multiple Fibonacci resistance which will be key.
A break up through there would open up a move toward 1.3400/10. A break below 1.2830/40 - the recent low - opens 1.2660/80 and then 1.2580.
Here's the daily chart: