The pound soared to above $1.35 in the immediate aftermath of the exit polls being released last night and although actual votes have more or less confirmed the big win for PM Boris Johnson’s Conservatives, sterling has given up more than 100 pips. This is, above all, because of profit-taking. Remember, sterling had been rising for weeks leading up to the elections as investors positioned themselves for a Tory majority outcome. Now that their expectations have been met, and the pound soared to the key psychologically-important $1.35 handle, it makes sense for some to book some profit. However, the path of least resistance remains to the upside and we could see renewed buying once the impact of profit-taking wears off.
Source: Trading View and City Index.
Looking ahead to 2020
I think sterling will appreciate in 2020 as Brexit-related uncertainties recede, boosting economic growth and, in turn, Bank of England rate hike expectations. After two Brexit extensions, three and a half years since the referendum and three Prime Ministerial casualties at Number 10, some of the political uncertainty has finally ended with the Conservatives winning the majority of votes in the election. PM Boris Johnson May now finally be able to break the Brexit stalemate. If parliament does pass the Brexit deal this time around, the UK will almost certainly leave the EU on January 31. The UK will then enter a transition period and trade negotiations will commence. Sterling could go on to reach low $1.40s in the weeks and months ahead. Investors will also be happy that a business-friendly party has been elected. But the focus will soon turn to trade negotiations, which should start in February. The negotiations could last months or even years. The longer the delay, the lower the potential upside for sterling.
BoE looking for swift recovery in UK data
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.