GBP, Brexit, and Post-Election Pop
Post the UK election, the GBP staged a sharp rally after a landslide victory for the Conservative party. The GBP after more Brexit outcomes hit a high of 1.3516. The result lifted the trade-weighted GBP to its highest level since the Brexit referendum. Market players cheered. Boris Johnson’s gamble to hold a snap election to break the deadlock in parliament paid off handsomely.
The Conservative party registered a vast majority of 80 seats. It was well ahead of consensus expectations for a smaller majority of between 30 to 40 seats. The Tories’ firm pledge to “Get Brexit done” clearly resonated well with the public. It helped the Tories turnover marginal seats in traditional Labour constituencies across the Midlands, Northern England, and Wales. Labour’s so-called “red wall” crumbled as even Tony Blair’s former seat in Sedgefield went blue. It was the most significant majority for the Conservative Party since Margaret Thatcher in 1987.
In contrast, it was a disaster for the Labour party who are on course for the worst result since 1935. Jeremy Corbyn described it as a “very disappointing night”. He also stated that he would not lead Labour into the next election. He will not step down immediately, and will oversee a “process of reflection”. The most likely scenario is that a similar more left-leaning figurehead will replace him to satisfy the Labour membership. It was the best result for the GBP in the near-term.
The new Conservative government will now move quickly to pass Boris Johnson’s Brexit deal. It will allow the UK to leave the EU by the end of January. The risk of a No Deal Brexit could not make the headlines until the end of 2020. This provides short-term relief for the GBP alongside the explicit rejection of Jeremy Corbyn’s left-wing policies. The large size of the Tory majority is a bonus as well. It will give Boris Johnson more room to maneuver in future negotiations with the EU over the new trading relationship. It could also potentially overextend the transition period beyond the end of this year.
Markets are unsure if the positive UK election result will lift confidence and spending. However, market participants keep their focus on business spending data. This is an indication of UK firms continuing to remain on the sidelines concerning investment until further clarity on potential trading relationships. It is unlikely that the start of negotiations over the future trading relationship will trigger such large swings in the GBP as we’ve seen in recent months in response to the Article 50 deadline and snap election.
BoE on Hold
As expected, the Bank of England (BoE) kept its monetary policy unchanged at its December meeting. The vote to leave the policy rate unchanged at 0.75 per cent was 7-2. Only two members wanted a loosening of monetary policy at this stage. The tone in the press release was similar to the November one, with the BoE also noting the unchanged outlook.
The BoE rates forecast is based on the assumption of an orderly transition to a free trade agreement between the UK and the EU. And while market participants believe a free trade agreement will be the result between the UK and the EU, it will be a tall order to land a deal before the end of this year, as Boris Johnson has vowed to do. As long as Boris Johnson refuses to extend the Brexit transition period beyond 2020, there could be a risk of a no-deal Brexit at the end of this year. Therefore, Brexit uncertainties could linger and dampen UK activity for the year ahead. That said, most expect activity growth to hold up well enough for the BoE to keep the policy rate unchanged at 0.75 per cent through 2020, but currently, the risk to this outlook is probably more to the downside.
GBP Technical Takeaway
GBPreflects the positive outcome of the UK election. While there is still scope for the GBP to extend its advance further above 1.3500, further gains are likely to prove more gradual and modest from here. For the GBP to continue its rise, market players will need to see evidence emerge that the UK economy is picking up in response to the reduction in Brexit and political uncertainty. The UK economy has ground to a halt in recent months. As 1.3250 contains the current correction look for another leg of corrective downside to target trendline support sited towards 1.2800 as this area attracts buyers we could form a base for the next leg of upside to target a retest of the 1.3516 highs.