Left or Right, Red or Blue or Something in Between?

The pound has enjoyed a welcome respite over the past couple of weeks following the news that a Brexit deal had been reached with the EU. That news helped the GBPUSD recover briefly above 1.30 at the beginning of last week. It then wobbled until it became clear that finally there is going to be a general election. That news helped the GBPUSD rebound to as high as 1.2976 yesterday. The monthly close yesterday was close 700 pips better than where the price ended up at the end of September.

The first major opinion poll for the up coming election was released yesterday morning and that helped to underpin the pound. The Ipsos Mori poll showed a 17 point lead for the conservatives with a 41% share of the vote. So, understandably, the pound lifted immediately on this news. However, it must be remembered that this poll was just the first, of literally dozens and dozens to come over the next few weeks. Consequently, much can, and probably will, change and the polls will toss and turn the currency on manyupcoming occasions too. That is something that anyone planning on trading the currency in the coming weeks does need to be acutely aware of.

Leaving that and this latest poll aside, the outcome of the election is far from certain. In the old days it was pretty much a binary affair, left or right, red or blue, but these days there are at least 4 protagonists fighting, what used to be, in most cases, generally just a simple duel. Well, it isn’t simple anymore and certainly not on a micro basis, when trying to assess how each and every constituency might play out.  What is also clear; is that these nuances might make for some really surprising results where one candidate might win a seat with less than a 30% share of the vote.  

As far as my own opinion is concerned I don’t mind telling you what concerns me most. That is the possibility of John McDonnell with his hands our money. Indeed, I have highlighted that concern many time here previously too.Whilst I think, or more rather hope, it’s unlikely, it is nevertheless not beyond the bounds of possibility and could happen by default, as a result of what I just said about the way votes could be split in many seats. So, in my opinion Brexit is no longer the toxic threat to the currency that it was, it’s McDonnell that represents a far greater threat now.

So, whilst the pound has rebounded, the question is will it continue? Of course it could and there’s a long way to go yet, but there is an important level to take note of that might be key in deciding how high the pound might go in the meantime. To better see what I am talking about please take a look at the chart below.

This is a weekly chart of the GBPUSD taken over the past decade. The yellow line running lower across the page defines the 200 week moving average. As you can see, the last two major rebounds in the currency have both stopped right at the point of breaking above this important moving average. As you can also see, that moving average has been trending lower over the whole of that 10year period. Currently that 200 week moving average is at 1.3140. Hence, this is a level that could and should, once again provide significant resistance to further gains. When noting that, it is also important to point out; that it is whether or not the price posts a weekly close above the moving average, or not that matters in determining its technical significance. Meantime, the pound is being buoyed by the current Tory opinion poll lead. However, if that starts to slip, then it will be reflected in the level of the currency.

More immediately though, today the market focus will be staring across the pond, to see what the latest US jobs report has in store. This is due for release at 12.30pm today. The consensus is that this report will show only a modest level of job creation in October. As usual the average earnings component will be watched closely too.

The Fed already cut rates earlier this week, as was expected, and today’s jobs numbers might have an impact on whether or not the Fed might repeat that exercise again before the year is out. Currently expectations on that are pretty low at around 20%. If that rate of expectation changes, then the dollar probably will too.

Important economic releases and events due Later Today

01/11- 12.30pm US October Unemployment Report

01/11- 1.30pm Canada October Manufacturing PMI

01/11- 2.00pm US October ISM Manufacturing Index