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Jignesh Davda

UK Election to Drive Volatility to the Pound

With the election now only a few days away, volatility stands to rise for the pound to dollar exchange rate.

Thursday’s election will ultimately determine how things will evolve with Brexit. UK PM Boris Johnson wants to push through the already negotiated deal with the EU and intends to do so if he wins a majority. The Labour party wants to renegotiate the deal and let UK citizens vote on it.

The outcome of the election will tend to have a major impact on the economy. The Bank of England has expressed concerns about declining business investments and the overall state of the economy. A further delay in the EU exit would exacerbate these issues.

Despite the view that a delay would hurt the economy, the Labour party has built its election platform around the premise of improving the economy for its UK citizens. Johnson, on the other hand, has been focusing his efforts on the importance of getting Brexit done.

The latest poll data shows the Tories lead rising slightly although it’s far from certain the Thursday’s election will not result in a hung parliament.

Investors seem fairly confident that Johnson will get his majority and have been buying up Sterling in response. The technical indicators for GBP/USD show potential for further upside although the pair trades near a significant resistance area.


Technical Analysis

Last week, the resistance I was looking at came from a weekly chart. More specifically, I was focused on the 100 and 200-week moving averages. The pair managed to close above both of them which shows underlying strength.

This week, I have my eye on the 50-month moving average. The exchange rate has not traded above it in five years. The indicator currently comes in at 1.3205.

GBPUSD Daily Chart

Further, another level that is significant on the larger time frames is 1.3145. This level held the pair lower in late 2018 on a weekly close basis.

While the upward momentum in GBP/USD is strong, I’m keeping a close eye on resistance levels because I can’t help but get the feeling the markets are getting ahead of themselves pricing in a Tories victory. This might be a scenario where the pound is bid on expectations and then sold on the result which tends to expose some upside risk.

Bottom Line

  • GBP/USD continues to show strength but trades near resistance that is significant on a monthly and weekly chart.
  • Volatility is likely to rise as we get closer to the December 12 election date.
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