GBP is on track to post a very strong gain this week against the USD, opening the week at 1.2535 and currently trading at 1.2850, or 2.5% higher. This rally was sparked off by UK Prime Minister Theresa May, who surprised the market by calling for general elections to be held on 8 June, in just 2 months time. Of course, this happening is subject to a vote today by the House of Commons, where there must be a two-third majority before the election can go through.
This sudden move by Theresa May was not expected, as she herself had ruled out any probability of an early election occuring countless of times – on 30 June 2016 when she became prime minister, in September 2016, Christmas 2016, and even as early as last month. Regardless, there is speculation Theresa May called for early elections for a number of possible reasons:
First, Theresa May stated she wants to get the general elections out of the way before Brexit negotiations begin, so any chance of power changing amidst Brexit proceedings would be ruled out.
Second, the Conservatives are enjoying a healthy lead according to a recent poll by The Guardian/ICM: the poll showed the Tories leading with 46%, followed by Labour with 25% and 11% for the Lib Dems.
I should state that GBP did not rally because of a chance that Brexit will not occur should the Conservatives lose power. This is because Theresa May had already triggered Article 50, which formalises Britain’s intention to leave the European Union on 29 March.
Why then did the GBP rally so much? My guess is certainty. The markets love certainty. They know the Conservatives are committed to Brexit proceedings, and the party looks set to stay in power due to their popularity in the polls, with their opponents in disarray at the moment. As such, there is a strong chance of a stable party leading the country through Brexit negotiations efficiently.
Now for the crucial part: Is the rally sustainable? Does the price action change the bearish gloom-and-doom picture of the GBP painted by the media and financial analysts? For example, in as early as January 2017, Goldman Sachs predicted the GBP would trade at 1.14 against the USD within the next 12 months.
My take is that GBPUSD or Cable, has settled into a range of 1.20 on the downside and 1.27 on the upside since October 2016. The flash crash could not force Cable lower, similar to talk on Britain losing its status as one of the world’s most prominent financial hubs, UK looking to suffer rough divorce talks with the EU etc. 1.20 was put simply, robust support.
At the same time, Cable could not break 1.27 on the upside, despite higher inflation levels rising in the UK, coupled with bullish talk from the Bank of England, as I detailed in my article here.
However, for the first time, this 6-7 month long rangebound behaviour has been broken, with Cable having broken 1.27. As such, I believe this move is significant and is worth paying attention to. Should GBPUSD consolidate above the 1.27 level, we could see price action testing the psychological mark of 1.30 soon.
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