The Great Britain pound performed rather well last week, but this week’s behavior of the UK currency will likely be extremely erratic and unpredictable. The reason for that is the UK general election on Thursday. The outcome of the vote will shape Britain’s political landscape, and thus it will determine chances for a no-deal Brexit.
Brits will vote on December 12, with each of the 650 constituencies of the United Kingdom electing one Member of Parliament (MP) to the House of Commons. The timing of the election is extremely uncommon as the last election held in December happened in 1923. Prime Minister Boris Johnson pushed for an unusual timing in a bid to secure a parliamentary majority. Indeed, polls favor Prime Minister’s Conservative Party, and experts think that a Conservative majority is the most likely outcome of the voting. And considering the latest moves of the sterling, markets prefer such an outcome as it means that the Parliament will likely ratify the current withdrawal agreement and the United Kingdom will leave the European Union with a deal. But UK polls are inherently unreliable as was demonstrated several times recently when the outcome of elections was very different from the one predicted by polls. That is because it is determined by how votes are distributed across regions, not by the total percentage of votes nationwide. Additionally, some analysts think that the upside potential for the sterling is limited even in the best-case scenario as markets have already largely priced in Tory’s victory. But if on the other hand, the voting results in a hung parliament, the sterling will likely tank.
Macroeconomic data will likely have a limited impact on the sterling this week as the traders’ focus is concentrated on the election. Nevertheless, macro reports are still important for gauging how healthy Britain’s economy is, and they still can affect the currency over the longer term. The vast majority of this week’s reports will come out on Tuesday. The most important of them will be the GDP figure and manufacturing production. Economists predicted that the data will show a growth of Britain’s economy by 0.1% in October after two months of decline at the same rate. Manufacturing production is expected to show an increase of 0.1% in October following a drop of 0.4% in September.
Forex Crunch released a neutral forecast for GBP/USD, unwilling to make bullish or bearish bets due to unpredictability of the election outcome:
This weekâs mega-event is the British election on December 12, and the pound could show strong volatility after the results are in. Investors are optimistic that the Conservatives will form the next government, and an outright majority for the Conservatives could see the pound record strong gains. However, nothing is certain when it comes to elections, and a Labour upset would likely send GBP/USD to lower ground.
DailyFX also released a neutral forecast but for a different reason. The problem is that the pound already trades near multi-month highs against many currencies, meaning that Britain’s currency will have a hard time to rally further even in the most-probable positive scenario. The article said:
While it would be easy to give Sterling a bullish forecast, I will rein things back and stay neutral, not because I think Sterling is going to fall, but on the basis that a lot of the expected âBrexit-Bounceâ in GBP has already happened and further rallies may be limited. The British Pound has rallied against a wide range of currencies since bottoming out in early-September and expectations are high that, all things being equal, this rally will continue early next week, although at a slower rate of trajectory.
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