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Jignesh Davda

Brexit versus Socialism

Prime Minister Boris Johnson called a snap election in October after parliament blocked his Brexit deal. Johnson saw an election as a means to end to get Parliament out of the gridlock created by the loss of his majority.

The British PM lost his majority following Parliament’s returned from summer recess after he purged members of the party that supported the opposition.

If Johnson gets his majority now, he intends to push forward the deal that is on the table by the end of next month. The Labour party, on the other hand, wants to renegotiate the deal and put the new negotiation up for a vote.

While the sole purpose of the election, from Johnson’s eyes at least, is to stop the endless Brexit delays, not all UK citizens see it that way. For the many that have grown tired of hearing about Brexit since the referendum three years ago, today’s vote is about electing a government that will serve its people. In this context, Johnson may have over estimated how big a priority Brexit is for the broader public. In contrast, the Labour party’s election message has largely focused on the state of public services.

The markets argue otherwise, placing a great deal of importance on a Brexit deal. An increasing conviction that Johnson will win a majority and get Brexit done, and a decline in chances of a no-deal Brexit, has pushed the pound to dollar exchange rate up 10% from lows in September. At the same time, with the markets driving Sterling higher in the past few months, the risk appears to the downside in the event of a hung Parliament.


Technical Analysis

There is a fair amount of resistance in play, although the outcome of the election will ultimately provide the catalyst for the next move in GBP/USD.

GBPUSD Daily Chart

The most notable resistance for the exchange rate comes from the 50-week moving average. This is an indicator the pair has not traded above in five years. It currently falls at 1.3206.

With a jump in volatility expected from the election results, GBP/USD can spike in both directions. For this reason, it may take a bearish break below the 1.3000 level to shift sentiment for the pair. This psychological level held the pair lower from mid-October until GBP/USD finally broke above it early this month.

To the upside, major resistance is seen near 1.3300. This level held the pair lower in the middle of 2018 and in the year thus far on a weekly close basis.

Bottom Line

  • The risk is tilted to the downside for GBP/USD after a notable rally and as election polls show that a hung Parliament cannot be ruled out.
  • The trend in GBP/USD is firmly to the upside. It might take a significant decline to shift sentiment. In this context, the 1.30 handle appears most relevant.
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