Election Uncertainty Only Has One Outcome in the Cable

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4 mins. to read
Election Uncertainty Only Has One Outcome in the Cable

On 7th May, 2015, the polls will open for the 2015 General Election, in what has been one of the most painstakingly dissected elections of recent times, primarily as a result of the uncertainty surrounding its outcome and the spectrum of parties that could play a key role. The focus of this edition of Master Investor is, of course, the election, and so it’s only fitting that I incorporate a political twist into this month’s forex piece. Those familiar with my style of trading, however, will be more than aware that allowing politics to influence my view of the currency markets flies in the face of my technical and risk management orientated strategy.

Generally, I approach the currency charts with something of an indignation towards major news releases and geopolitical events. But perhaps indignation is the wrong word. More apt would be to say that I view these fundamental factors as secondary to what price action tells me. It’s not impossible, however, to take a look at how the outcome of the UK election might affect my medium-term directional bias. I have talked about Shinzo Abe, and the implications of his stimulus policy in Japan, and in turn, how this affects my dollar/yen bias in the past, and I will attempt the same here.

First, I want to stress that my bias towards any particular party strictly relates to how I believe that party’s policy might affect the value of sterling versus its major counterparts – it is not reflective of my personal political opinions. However, this is not to say that they may not be aligned!

So, let’s get to it. For me, everything is rooted in uncertainty. The chance of any of the two parties achieving a majority government is almost non-existent, and so there are a number of outcomes we could potentially be faced with, and further, a number of factors that could influence these outcomes.

Polls at the last count had Labour and Conservative with around 31.6% and 33.7% of the vote respectively, accounting for 280 seats for the Tories and 282 seats for Labour.

The two most likely outcomes are a Conservative minority government (for me, this is the most likely) and a Labour minority government, both of which would precede a race to scramble together a vote by vote parliamentary alliance needed by each political leader to survive the term. It took just short of a week for the 2010 elections to resolve in a coalition government after Election Day, and if we get something similar (an even more sustained period is looking potentially more likely), uncertainty will be king in the sterling crosses.

Regardless of the outcome, therefore, the policies of the party or parties that take the reins will not – at least in the medium-term – have too much bearing on the value of sterling versus its major counterparts. What will have bearing is the fact that – as a result of the uncertainty – the currency markets will interpret the situation in the UK as unstable, regardless of whether this actually reflects the fundamental situation.

In the currency markets, uncertainty virtually always translates to downside pressure. We saw it with the forming of the coalition in 2010; we saw it when the US government ceased operations a couple of years back; we saw it when a Malaysia airlines plane went down in Ukraine early last year; and we will see it again for the first three weeks of May in the UK.

So, with this said, my overarching bias in cable for at least the first half of May – and likely for a few weeks after – is bearish. This is not to say I will be completely averse to entering a quick counter trend long position if we get the right price action set up, but it will have me keeping a close eye out for any potential downside signals, and help me to define my risk parameters with much more confidence than I might otherwise be afforded.

GBP USD

GBP/USD Daily

What are some of the key levels we are approaching in cable that I will be keeping an eye on?

Take a quick look at the chart. The chart shows that – very much against the overarching trend for the year – we have seen some bullish momentum in cable over the past couple of weeks. Pretty much 10 days straight of gains has brought us to trade just ahead of what I deem key long-term resistance around 1.5160. If the uncertainty described in this piece develops into some downside momentum, I will be looking for an initial run towards 1.4600, and for a break of this level to bring 1.4 flat into play longer-term. As always, I’ll be looking for candlestick patterns to dictate my entries and exits; in this situation, primarily bearish pin bars around the key levels outlined.

Now let’s wait and see what happens…

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