The UK General elections on June 8th was the most important risk event for the Pound since the Brexit referendum. Unfortunately for the Sterling, the elections resulted in a hung Parliament as the ruling Conservative party failed to command the majority needed and the Pound dropped almost 3% when Britain woke up to an uncertain political stage in the face of the Brexit negotiations. The important question now is how the elections’ result will make for a harder or a softer Brexit and whether Theresa May has any future as a Prime Minister.
Before the elections, the United Kingdom was seeing a string of impressive figures from the domestic economy accompanied by optimism from the BoE - there were even rumors about a rate hike. This bullish bias had helped the Pound gain almost 8% against the Dollar since early March up until late May when it edged above 1.3000. Even during the run-up to the elections the Sterling was up more than 3% as analysts were predicting a landslide victory for the Conservative Party. However, the result was a lot different.
Moving forward, Theresa May still seems determined to adopt a hard negotiating stance with the EU and walk away from talks without any deal if it is not what she believes is best for the country.
Apart from what kind of deal the UK will eventually strike with the European Union investors now have to worry whether a change in leadership is imminent, who the new PM might be and what his or her approach to the Brexit negotiations will be.
The Pound faces an uncertain future following the elections’ result and the start of the Brexit negotiations and is expected to trade with a bearish bias in the weeks to come .
In terms of trading action, I would be more interested to look for opportunities to sell the Pound against the Euro rather than the Dollar. While deteriorating data from the US cast doubts on Dollar’s outlook, the Single European currency seems to be benefiting from the improving conditions in the Eurozone. The EUR/GBP cross looks poised to rally towards 0.9200 if the current bias remains in place which presents us with a nice trading opportunity.