GBP breaks-up – AmpGFX

The research team at Amplifying Global FX Capital explains that the GBP has surged over 2% on a gambit by UK Conservative Party leader and Prime Minister Theresa May to call an early election and more broadly this appears to have helped drag the USD somewhat lower.

Key Quotes

“GBP/USD has busted up out of its range since the flash-crash in early-October last year that appeared to follow confirmation that the UK government would seek a so-called hard-Brexit, leaving the single market and giving up banks’ passporting rights, undermining the future of London as the financial hub for Europe.”

“The UK government will still pursue a hard Brexit and the form of new trading relations with Europe remain highly uncertain.  Nevertheless, excessive pessimism over the future of the UK economy outside of the EU has apparently faded significantly with this simple surprise announcement for a fresh mandate by the UK PM May.”

“A stronger electoral mandate would increase her capacity to lead Brexit negotiations with the EU with less interference from varying opinions within her own party and across parliament, and less electoral pressure, extending the term of parliament from 2020 to 2022, well beyond the 2-year timetable for Brexit negotiations.”

“PM May must achieve a two-third vote in favour of her motion for an early election.  The vote is scheduled for Wednesday, but the main opposition parties have indicated they will support the motion, paving the way for the early election called for 8 June.”

“Given the close referendum vote in favour of Brexit on 23 June (51.9% for, 48.1% against) one might wonder if the election will serve as a kind of referendum do-over.  However, the main opposition party – Labour – does not have a clear position on Brexit, and many Labour voters are in favour of Brexit.”

“The prospect of another Scottish independence referendum continues as a potential negative for the GBP. However, it has been on the cards for some time, and is unlikely to happen ahead of Brexit, by which time the Scots may again decide it is better the stay with the devil they know.”

“PM May may have calculated that many moderate pro-EU voters will see Brexit as inevitable and vote for the Conservatives to give them a stronger position from which to negotiate a better deal and a clearer path for the UK in a reasonable timeframe. This might be preferred to a mixed vision of Brexit that lacks broad parliamentary support and leaves the UK in a poor negotiating position that drags on and risks the UK being dropped out of the EU without any new trade deal in sight.”

“The market is coming from a position of having factored in a significant degree of downside risk for the UK economy.  The GBP has fallen significantly in the lead up to and after the Brexit vote.  The futures market suggests that traders are significantly short GBP, but near a record margin.”

“As such, if the Conservative Party and PM May campaign effectively and maintain or increase their majority in parliament, the GBP has scope to post a further recovery of its losses since the 23 June Brexit referendum.”