GBP/USD jumped more than 150 pips on exit polls from the UK elections. These showed a strong showing for the incumbent Tories that are considered business friendly. The markets also like continuity. But this is far from a done deal.
Looking into the data, here are reasons to doubt the outcome. and the market reaction. Do we have a short opportunity on GBP/USD? Here are 5 reasons for a short on cable.
- Surprising gap between the big parties: Conservatives at 316 and Labour at only 239 seems improbable given the huge amount of opinion polls showing a much tighter race. 239 seats for Miliband would be the worst outcome since 1987.
- UKIP only on 2 seats?: This isn’t only poor in comparison to the opinion polls but also contrasts one of the first real results that shows a good performance for the party. It’s also important to remember that people voting for extreme parties do not like to admit it in polls. So, voters could have placed the Tories in the exit poll ballot and UKIP in the real one.
- SNP at 58 out of 59?: The instant reaction from the exit polls showing a huge victory for the Scottish National Party by its leader was along the lines of “huge caution”. This seems too much. It’s important to remember that the SNP actually lost its bid for Scottish independence by a clear margin back in September.
- Thin liquidity: The exit polls were released after New York shut down and before Tokyo came into play. With markets open only in Australia and New Zealand, the markets’ reaction may have been exaggerated.
- And even if the results are correct: 316 for Cameron’s party and 10 for his junior coalition partner led by Nick Clegg is barely a majority. Leaning on even smaller parties puts a potential coalition on 334 out of 650. This could not be called a stable one. In addition, if the exit polls miss by just a bit, this slim majority is erased.
So, the night is still young and the initial reaction with GBP/USD above 1.54, seems far out.
What do you think?
More: GBP: Trading The UK Elections – Credit Agricole
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