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The dynamics of GBP as we head towards the General Election

by Ashraf Laidi

The reaction to UK elections in the various GBP crosses will largely depend on the extent of uncertainty leading to Election Day, the duration of hung parliament (if any) as well as the fundamentals in each individual currency that involves GBP pairs.

The potential for a lose-lose election scenario on the British pound rests on the argument that a Labour win would be a negative for business (raising taxes on the wealthy, slowing down deficit-reduction and impacting tax advantages for non-domicile residents). While a win for the Conservatives could weigh on sterling if PM David Cameron keeps his promise to hold a referendum on the UK membership in the European Union, a rejection of which would be punishing for businesses and the markets.

Sterling and gilts fearing Labour/SNP coalition

A Labour win via a coalition with the Scottish Nationalists (SNP) would be received as worst of the plausible scenarios for the pound and gilts due to the following:

  • Anti-business fears surrounding Labour could be amplified by re-emerging worries that SNP will stick to its UK break-up agenda and the calls for Scotland-bound fiscal transfers from the rest of the country
  • Spending-oriented policies by Labour and SNP will recall downgrade warnings from credit agencies and introduce sovereign-negative factors to gilts and GBP – as was the case in 2011 and 2012.
  • Labour’s governing majority status would be at risk later in the next Parliament as it’s set to lose seats to SNP in local elections, further hampering confidence in policy-making and clarity for the business agenda.

Possible impact on GBP/USD

  • Already at five-year lows as a result of increased expectations of a Fed hike later this year, GBP/USD is at risk of extending declines towards 1.4230.
  • Even if the Fed delays raising rates into late 2015 or beyond, it remains the only central bank likely to tighten before the Bank of England and is therefore seen as the preferred GBP short in the event of an negative elections outcome.
  • GBP/USD is gradually breaking out from its nine-month declining channel from last summer’s peak (on weekly chart), and the upside may encounter election-bound selling near 1.5220 – the 100-DMA, which hasn’t been broken since last August.
  • Technical vulnerability could be triggered by election fears and the resulting BoE dovishness, could give way to 1.4200 and 1.3700 as the cascading of sell stops proves violent – as was the case ahead of the Scottish Independence Referendum.

Possible impact on EUR/GBP

  • EUR/GBP remains in a five-month down channel but a break below 0.7200 could be stabilised around 0.7000 in the event of a negative GBP scenario, and this could be followed by a potential climb back towards 0.74, until Eurozone concerns re-emerge.
  • The ideal scenario for GBP bulls is a Tory win and a renewed deterioration in Eurozone deflation which could extend selling towards 0.70.
  • A negative scenario for GBP may emerge if an EU referendum is pushed through by the winning government. In which case, EUR/GBP could break the declining channel that has been in place since November and bring 0.77 in to view.
  • EUR/GBP upside would be likely to emerge if Eurozone CPI data continues to show smaller negative figures until deflation is left behind.

Possible impact on GBP/JPY

  • The best-case scenario for GBP/JPY is combination of a Tory win (positive for GBP & risk appetite) and a Bank of Japan announcement of an increase in monthly asset purchases, or QE.
  • The above ‘best case’ scenario for GBP/JPY would likely trigger a break above the December 2014 triangle and could then extend towards 184.00.
  • The worst-case scenario for GBP/JPY is a Labour majority (particularly via SNP), coupled with the Bank of Japan holding off on adding more QE in Q2. In which case, GBP/JPY would likely be exacerbated by a sell-off in global bourses.
  • GBP/JPY could be dragged back below the 200-month moving average (MA) of 176.00, with a follow-through decline towards 169.00 – a confluence support of the 100-week MA and the base since February 2014. In the event of a breach below 169.00, the bottom could fall to as low as 150.00, which is the 200-week MA (a technical level not reached since December 2012).

Possible impact on GBP/AUD

  • GBP/AUD is considered to be among the least negative of the GBP crosses because of the Aussie’s ongoing damage due to expectations of further easing by the Reserve Bank of Australia as well as deterioration in prices of iron ore and China’s slowdown.
  • GBP/AUD rests on an upward channel starting in September 2014, whose equidistant support levels show a rare symmetry.
  • A GBP-positive election outcome may amplify a GBP/AUD bounce towards a 100-day MA and towards a temporary triangle resistance of 1.9700, a break of which could extend to as high as 2.0000.
  • A Labour victory and the lack of an interest rate cut from the RBA poses a risk of breaking the downward channel towards 1.8500 – a confluence of supports between 55-week MA and 100-month MA.

Possible impact on GBP/CAD

  • This is probably the more neutral of the three GBP crosses as CAD is caught between the uncertainty of oil prices, the positives of an anticipated US recovery and any stimulus program from China.
  • A Labour win and prolonged oil stabilisation are the components of the worst-case scenarios for GBP/CAD.
  • Key support starts at 1.8155 (a November trendline), a break of which is seen extending towards 1.80 until stabilisation emerges near 1.7740 – the 100-week MA.
  • Upside from a Tory win could help a bounce off 1.83, while renewed oil weakness could extend gains to 1.87.

Possible impact on GBP/NZD

  • Currently testing the base of a two-year channel, GBP/NZD is vulnerable to breakdown if 1.90 is taken out.
  • A Labour-SNP coalition and renewed robustness in New Zealand dairy prices would be major catalysts to the breakdown of two-year channel support, which is ultimately eyeing a 1.8860 low from June 2013.
  • If stock market volatility from a Labour win and fresh deflationary pressure force the BoE into easing mode, then GBP/NZD may test its 1.85 base.

Possible impact on FTSE 100

  • The FTSE 100’s new record highs have been helped by rebounding oil prices, a cheaper pound and improved optimism from ECB asset purchases.
  • The best-case scenario for the FTSE would be a Tory win – providing there was no aggressive push for an EU referendum – which could lift the index to the top of its rising five-year channel at 7.450, especially if the BoE removes rate hike uncertainty from 2015.
  • Any negative scenario could break December trendline supports and extend towards a 100-week MA of 6.667.
  • In the three months after the last five elections, the FTSE 100 was higher in three cases (1992, 1997 and 2005). While in the 12 months after those elections, the FTSE was up on four occasions (1992, 1997, 2005 and 2010).

Election outcomes

Currency pairs Conservative-led government Labour-led government Hung parliament
GBP/USD Upside seen retesting 1.5350 trendline resistance, especially on reduced odds of Fed hike. Sell-off to 1.4050s may extend to 1.3700, especially with SNP partner, while strong US jobs reignite calls for summer Fed hike. Extended uncertainty to pave way for 1.40s as long as Labour-led government remains plausible.
EUR/GBP Most GBP-positive reaction on Tory win to threaten 0.70 but EU referendum promises to provide support. Best scenario for EUR/GBP recovery to test top of December downchannel to target near 0.7330s with help of rise in Eurozone CPI. Most volatile scenario for the pair – to probe 0.7050s while any rebound near 0.73 is seen rejected.
GBP/JPY Best case, especially with BoJ QE possibly breaking December triangle of 181 & extend to 185. Worst case, especially if no new QE from BoJ. Risks breaking 2012 channel support & 100 WMA at 170 especially on sell-off in global bourses. Could threaten 170.00 but 100 WMA is more likely to hold than in case of Labour win. BoJ QE remains major factor.
GBP/AUD Best case for pair to retest 1.97 and could call up 2.03 in event of RBA rate cut in May. To probe September channel support near 1.90 and breakdown to 1.86 if RBA holds in May and China announces stimulus package. Could intensify fluctuations in already volatile pair and 1.8830s retest before considering 1.8500.
GBP/CAD Positivism from Tories helps pair to 1.84 but technicals and Canada to limit upside. Risks extending downside below 1.80, especially on extended oil support above 50 onto 100-WMA of 1.77. Hung parliament followed by Labour win is worst case, to trigger 1.77 and possibly break below 1.65 base.
GBP/NZD Best case if helped by weaker NZ inflation as key requirement to help support atop 1.93. Risks breakdown of 24-month channel and extend losses to 1.89 base, especially if RBNZ remains neutral and dairy prices stabilise. Combination of uncertainty and ultimate Labour win is worst-case scenario – could call up 1.85.

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