Trading The UK General Election This Week

(air whooshes) Hey, guys, it’s Arno here, and welcome to another “Week Ahead” video. Now, as you guys know, I
am one of the commentary analysts on the Forex Source platform. If you are one of our
subscribers, you would have heard my voice in the news feed, as we do the daily video
commentary analysis, so for today’s video, I thought I would invite you guys into my office to show you exactly how the trading
setup works or how my work setup works from where
I do the daily videos. Now, in today’s “Week Ahead” video, we are going to be focusing on the pound. As you guys know, on the 12th of December, which is Thursday, we have the
general election for the U.K. Now, this has been a very hyped-up event. The markets are very
psyched for this event. We have seen very interesting
moves in the pound in the run-up to the
election, and we think we can see a lot of volatility
in the pound depending on a few scenarios and
outcomes for this election. So, without further ado,
let’s jump into today’s video and we’ll see exactly how we
can prepare for these events, and possibly trade the
different outcomes as well. All right, so as always, we will start by looking at the baseline
for the relevant currency. In this case, it is the pound. Now, we’ve seen a lot
of strength in the pound from the middle of October, when we had those first breakthroughs with regards to the new withdrawal agreement. Now, if we look at the charts, we can see that from the 10th of October, across the board we’ve seen
huge moves in the pounds, and if we look at the
pound-USD specifically, it has rallied almost 950
pips from the 10th of October as the market has started
to unwind some of the short positioning in the pound,
and as those expectations for an orderly Brexit began rising. Now, the new deal brokered
by PM Johnson’s government has caused the likelihood
of a no-deal Brexit to diminish, which has
also been supportive for the pound in the medium
term, and apart from that, we also saw the pound being supported recently in the run-up
to this general election, as the market is widely
expecting the Conservative Party to take a majority win
in next week’s election. Now, even though we have
seen some up and down moves in the pound in the short term due to some contradiction in election
polls, the medium-term buyers as well as the short-term buyers
has remained to the upside. Then, looking at the baseline
for this week’s risk event, which is the general election, currently, the election polls do suggest
that the Conservative Party will take a majority win. We have the MRP model,
which is the only one that correctly predicted
the 2017 election results, that is basically suggesting
that the Conservatives will win by majority,
and from the recent moves in the pound, it’s clear that the markets are already pricing it and gearing up for a Conservative majority win. However, history would caution us here just to be a little bit careful and not to read too much into the polls. The winner-takes-all election
system caused big surprises in 2017 with the election, and
you guys will also remember that in the 2016 referendum,
the markets were widely expecting a Remain vote due to the polls, and that came out as a Leave vote. So we’ll be careful not to put
too much trust in the polls. Even though the polls are
very useful for building those expectations in the
run-up to these type of events, like the referendum and
the elections, the results from the 2016 referendum and that election caused big surprises when
the actual results came out, which differed substantially
from the poll results. So, something just to
keep in mind is that a few politicians has also recently mentioned that the gap between
the two major parties, which is the Conservatives and the Labour, are not really as wide as some of the recent polls have suggested. Now, if that is really the case, it would seem that the gap
between the Conservatives and the Labour Party doesn’t
really need to narrow all that much to cause
another hung Parliament, which is also something
just to keep in mind. Now, there is a couple
of possible scenarios that could play out from this election. So far, as we said,
the market is expecting that majority win for
the Conservative Party, and that is very
important to keep in mind, as any change from that
expectation would basically be against the market’s current consensus. So, then, looking at some possible sentiment shifts, and the
first ones we’ll look at is the dovish sentiment shift. Now, a Labour Party victory,
the first and biggest dovish sentiment shift for the
pound in the short term could occur if the Labour
Party pulls off an unexpected majority or minority win
in this week’s elections. A win by the Labour
Party would most likely cause a significant sell-off in the pound for the following three reasons. Firstly, it’ll basically
be against the market’s current consensus for a Conservative win, secondly, Labour’s economic
policies are expected to have negative consequences
on the U.K. economy, and thirdly, a Labour
Party victory also makes the possibility of a Scottish
referendum much more likely. Now, the first reaction in the pound from a surprise majority or
minority win by Labour Party will mostly likely be a very big sell-off in the pound across the board also, as the recent gains in the
pound from the expectations of a Conservative win is
unwound in the markets. However, there is
something that we just need to keep in mind, and that is
that a Labour Party victory, especially a majority victory, does make a second Brexit
referendum much more likely. Now, as you guys know, a second referendum is seen as largely positive for the pound because a lot of people
have suggested that if we do get a second referendum,
the majority of the U.K. will just vote to Remain in
the U.K., as they don’t want to be caught up in this
Brexit mess for any longer. So if the market’s attention
turns to the likelihood of a second referendum,
that could create lots of unwanted and unexpected
volatility in the pound and could cause some
whipsaw in the markets. Now, that does pose a
challenge for us for trading the pound in the short term,
as it would be very tricky for us to establish
exactly when and whether the market’s attention turns away from the economic policies
and the negativity towards the possibility
of a second referendum. Knowing when the market’s attention shifts can make it very tricky
to trade the pound, so that is just something to keep in mind. Even though we do expect a big sell-off if we do get a Labour Party victory, there is that possibility
of a second referendum if they do get a majority win, so that is just something
to keep in the back of our minds when we do trade the pound from a surprise majority win by Labour. Then, a second dovish shift
would occur in the pound if the Conservative
Party wins the election but they fail to achieve that majority. Now, that would cause
political uncertainty, and it will probably
force the Conservatives to try and form some form of coalition in order to avoid another hung Parliament. Now, whether the Conservatives manage to form a coalition or not, it will mean that the
Conservatives will struggle to pass the withdrawal agreement bill, and that also increases the possibility of a no-deal Brexit once more, and that will probably
cause markets to start to reprice their current expectations for an orderly Brexit
and to start repricing in the possibility of a no-deal Brexit, and that would pressure the
pound in the short term. Now, if that happens, we
would see additional downside risk develop in the pound,
especially since the market will start to reprice some of
that pre-October uncertainty that saw the pound struggle
for the majority of 2019. Now, there’s also a slim
chance that Labour Party could form a minority
government if the Conservatives fail to form a coalition, which would also be seen as a negative
at first, and that would also open up a lot of
political uncertainty for the road ahead in
2020, and, on balance, would be a negative thing for the pound. Okay, then looking at a possible
hawkish sentiment shift, a majority victory by
the Conservatives will be the most positive outcome for the pound in this general election,
as that would mean that PM Johnson should be able to get that Brexit withdrawal agreement deal through Parliament in time to
leave the EU by January 31st. One thing to note on
this, though, is that we have seen a lot of positivity
priced into the pound already recently with the expectation of a Conservative Party majority win, so there is always that
possibility that we might see some form of a “buy the
rumor, sell the fact” reaction if the Conservatives do
get a majority victory. However, a majority win also
means that a disorderly Brexit, as well as a Scottish
referendum, as well as an abrupt end to the December
2020 transition period is much more unlikely, and that, on balance, is still very pound positive, so that’s just something to keep in mind. So, on balance, a majority victory should be the most positive
reaction for the pound, but just be careful of some
possible price action swings due to the current positioning
and the possibility of some sort of “buy the
rumor, sell the fact” reaction that might occur in the pound this week. Now, how you can look to trade the pound. In the case that we do get
a dovish sentiment shift, we could look to pair the
pound against something like the Kiwi dollar, which
has remained well supported after the RBNZ opted to
leave rates unchanged at their prior meeting and opted for a wait-and-see stance
in monetary policy. We’ve also had some
positive recent developments for New Zealand dollar with some changes in capital requirements for
New Zealand dollar banks, and we also had positive comments from deputy governor of the RBNZ, who stated that the New Zealand economy is moving towards a turning point and that even though there
is still downside risks, they are looking more balanced. Now, in the case of a
hawkish sentiment shift, we could look to pair the
pound against the euro, which remains fundamentally bearish due to the current economic slowdown in the European economy,
as well as the softer monetary policy stance
with the introduction of the ECB’s latest stimulus package. Now, this event, whether we have a dovish or a hawkish sentiment
shift, is valid for trading a phase one trade if we get
a clear sentiment shift. Now, if you’re interested to learn how these phase one trades
work, you can check out our news trading strategy playlist on our YouTube channel, where
we post weekly examples of how these type of trades play out. If we do get a phase one move generated by some form of sentiment shift, then we could look to also
trade a phase two pullback of that initial move. Now, if you want more information on that, we do post updates on these moves inside our tradable
sentiment shifts reports inside the Forex Source Terminal under the market insights
tab on a daily basis, and you can see each day
which sentiment shifts are still in play and
which ones are still valid for trading any phase two pullbacks, and you can also learn
about how these setups work and ask any questions that you might have about them during our
live analysis webinars that we hold each day inside
the Forex Source Terminal. And there we go, guys. Thank you so much for taking the time to watch this video, as always. If you find the content
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guys again next week for the next “Week Ahead” video. Cheers! (air whooshes)

  1. In short to medium term,I think the CAD is also one of the weak currencies to pair against a strong GBP.This is due to the worst employment data last week Friday.

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