The reaction of currencies to the elections is as different as day and night. While the overwhelming majority in Mexico and France is seen as a negative for the peso and the euro, the opposite is true in the US and the UK. Let’s delve into this topic and make a trading plan for GBPUSD.
The article covers the following subjects:
Highlights and key points
- The Labour Party will win the national election by a large margin
- The Labour’s policies are positive for the pound
- Deteriorating statistics puts pressure on the US dollar
- The pound may soar to 1.287 and 1.295
- The Trump factor will limit GBPUSD’s rally
Weekly fundamental forecast for pound sterling
The current political landscape has made predicting election outcomes more complex than ever. It’s no longer sufficient to rely solely on polls; understanding the margin of victory is now crucial. The recent unconditional victory of Claudia Sheinbaum and her Morena party in Mexico led to a collapse in peso quotes. Similarly, fears of a right-wing victory in France have long been pressuring the euro. However, the Republican sweep in the US and Labor’s triumph in the UK are viewed as positive developments for the US dollar and the pound.
Everything is more or less clear with the greenback. It is a safe-haven currency, and Donald Trump’s return to power with his protectionist policies and widening budget deficit will increase market volatility and make investors flee to safe assets. As for the pound sterling, the picture is more complicated.
Polls show Labor outperforming the Conservatives by 20 points. The ruling party is so unpopular that it will get around 20% of the popular vote and risk losing second place to the Liberal Democrats. This will be a disastrous defeat for the Tories, who have led the country for 32 of the last 45 years.
Results of pre-election polls
Source: Financial Times.
The Labour Party will likely win an overwhelming majority, but this does not scare investors like in Mexico or France. Markets believe that under the new government, they should not expect significant and unreasonable spending increases. On the contrary, the party will stick to plans to improve the budget balance gradually. The country will reestablish its close ties with the EU, supporting the GBPUSD pair.
With its second slowest GDP growth after Germany in the G7, the UK is starting to be perceived differently after the pandemic. It has removed the tag of Europe’s sickest person and became the most tranquil place in Europe. British and French bond yield spread is narrowing, and the difference in volatility between the FTSE-100 and CAC-40 is visible to the naked eye.
France-Germany bond yield spread
Source: Bloomberg.
Stock indices’ volatility
Source: Bloomberg.
The growing attractiveness of UK assets compared to continental Europe, the new government’s transparent policies, the rapprochement with the EU, the economic recovery, and a high repo rate compared to other central banks are the pound’s advantages, which may increase its chances of becoming the top-performing G10 currency at the end of the year, especially in light of the weakness of its main counterpart, the US dollar.
Weekly trading plan for GBPUSD
The signals about the weakness of the US economy have been coming in with an enviable regularity. This increases the chances that the Fed will start to taper in September, putting pressure on the greenback. However, the GBPUSD pair will unlikely soar significantly by the end of the year, as the Trump factor will limit a bullish trend. However, in the short term, the Labor victory and weak US employment statistics will be compelling reasons to buy the pound with the target at 1.287 and 1.295.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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