Pound-Dollar Rate Tipped to Suffer Profit-taking as Markets Wait on Election Outcome

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- GBP roadblocked by resistance at May highs on charts.

- Slips on profit-taking after YouGov poll, could fall further.

- Charts suggest failure of GBP uptrend near current level.

- As election polls suggest all good news is in price of GBP.

- Small Tory majority or hung parliament would weigh heavily.

The Pound-Dollar rate stabilised Wednesday in the wake of overnight losses but could suffer from further profit-taking over the coming days because charts show the uptrend in the British currency is failing, while some analysts are also suggesting all of the available 'good news' is already in the price of Sterling. 

Pound Sterling beat a hasty retreat overnight and into the morning session Wednesday after the influential YouGov 'MRP model' of the post-election parliamentary figure suggested Prime Minister Boris Johnson's likely majority has shrunk in the last week. Johnson was previously projected to win a 68 seat majority in Thursday's general election but that was cut down to just 28 by YouGov barely more than 48 hours before polls close on election day. 

So narrow is the new implied majority that a hung parliament scenario is now a possibility that exists within the margin of error, which just might be the worst of all worlds outcome for markets because it would keep the prospect of a 'no deal' Brexit alive while guaranteeing continued infighting and indecision in Westminster. Markets favour a Conservative win and have bid the Pound higher for weeks as polls showed the odds of one improving, but the uptrend is now showing signs of failure on the charts.

Above: Pound-to-Dollar rate shown at hourly intervals.

"GBP/USD has reached the 50% retracement of the move down from 2018 at 1.3167 and the 1.3187 May high and the January high at 1.3217 - this is tough resistance and we look for the market to see initial failure here. We note the daily RSI has not confirmed the new high and we note the TD perfected set up on the daily chart. Both imply some profit taking," says Karen Jones, head of technical analysis at Commerzbank

Jones, who led Commerzbank's technical analysis team to the top spot in the Euromoney FX survey this year and who's strategic themes trading portfolio is up 17.3% for 2019, told clients on Wednesday to sell the Pound-Dollar rate around 1.3167 and 1.3187 but to have a stop-loss at 1.3220.

She's been flagging signs of waning momentum on the Pound-Dollar chart for days and has warned that Sterling could suffer from further profit-taking up ahead. Traders who've bet on the exchange rate in recent weeks but who don't want to risk losing profits in any declines that might materialise after the election might feel compelled to at least partially close their wagers ahead of Thursday night's election results although doing so would required them to sell the Pound. 

Above: Pound-to-Dollar rate shown at daily intervals.

"Overall, the developments support our view that a lot of good news has already been priced into the pound. The pound will struggle to extend advance much further in the near-term unless the Tories win a larger majority. In contrast, the pound will be much more sensitive to a hung parliament and quickly fall back below the 1.3000-level and towards support at around 1.2700-1.2800 to reflect the increased uncertainty," says Fritz Louw, a currency analyst at MUFG.

Louw says anything less than a 20-to-30 seat majority for the Conservatives would likely be taken negatively by the Pound because it would leave the government beholden to some of its most ardent Brexit-supporters in the negotiations. And that's exactly what the YouGov numbers implied this week.

A small majority is bad because with Johnson having committed to completing the Brexit negotiations before the end of 2020, politically contentious concessions could be demanded by the EU as the price of an agreement in the next phase of negotiations and Brexit supporters in the government might prevent him from making them. The EU would have its new 'backstop' as leverage for securing concessions that would be the price of an agreement on trade and keeping the UK together in its current form as it exits the 'transition period' that Johnson's withdrawal agreement commits the country to. 

The YougGov MRP poll has developed its own market-moving quality because it was previously billed as the only poll to have correctly anticipated the 2017 election outcome. And with the Conservatives underpeforming their implied haul in 2017, while the radical opposition Labour Party outperformed, markets were conscious Wednesday that a repeat performance is now a possibility.

 

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