How to trade the UK elections with GBP/USD – the

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Brits go to the polls on June 8th in what has turned out to be an unexpectedly open campaign. High uncertainty about the results and also about the turnout imply a potential for high volatility.

Here is a full guide to trading the elections, with background, expectations, trade ideas and levels to watch on GBP/USD.

Update: UK exit polls show NO CON majority – GBP crashes

Markets want a landslide Tory victory

When PM Theresa May announced the snap election back in April and sent the pound jumping, opinion polls showed her leading by huge margins, sometimes exceeding 20%. The opposition Labour Party seemed to be in total disarray.

Her move was meant to consolidate her power not only against the rival party but also against her hardline Brexiteer colleagues. With a large majority and her own personal mandate, she would have more control.

Markets saw the elections as an opportunity for a softer Brexit. With less opposition from within, May, a “quiet” Remainer, would opt for a better deal for the British economy. The pound rallied quite strongly.

This scenario is still possible, but things have changed since then. The elections shifted away from Brexit to the National Health Service (NHS), standards of living and the NHS. In the last weeks of the campaign, the horrific attacks in Manchester and then in London put security on the table.

From a lunatic leftie, Jeremy Corbyn turned into a more plausible leader amid better public performances. On the other hand, Theresa May had quite a few embarrassing moments.

All in all, there is a sense of a real contest.

Polls are all over the place

Opinion polls show a tighter race, but how close is it really? After the polls missed the Conservative victory in 2015, an inquiry was set up. This time, we cannot blame pollsters for herding. Each company provides a detailed explanation of its methodology and the results are totally different.

Some pollsters show a narrow 1% lead for the Conservatives over Labour, while others show an 11% lead. Some pollsters may be overcompensating for previous errors and others have totally changed their methods.

Perhaps the biggest issue is the turnout of younger people. Older folk reliably turn out to vote and lean towards the Conservatives. Younger people tend to move more and vote less. They lean more towards Labour. Will they show up this time? Each polling firm makes different assumptions, and we will only know the turnout on election day.

What do topline results mean?

  • 6-7%: The average of polls shows a lead of this sort, and it translates into an absolute majority for CON, similar to their slim majority now. This would return May to Downing Street, but will not strengthen her too much.
  • 10-12%: This is already a landslide victory for May, putting her in full control, mostly over her party and with a better hand at the Brexit negotiating table.
  • 1-3%: A close race with Labour would result in a hung parliament: no party would gain an absolute majority. While CON would be ahead of LAB, a coalition government would need to be formed and this could take time. Another round of elections is also possible.

An outright victory for Labour seems quite unlikely at this point.

Trading the elections during the vote

As aforementioned, the results heavily depend on the turnout of younger people, which do not vote in a consistent manner.

Voting starts at 6:00 GMT (7:00 in the UK) and ends at 21:00 GMT (22:00 in the UK). During the day, we will get updates on the turnout.

A high turnout is good for Labour and bad for the pound. It implies higher chances of a hung parliament.

A lower turnout implies reliable Conservative supporters turning out with fewer opposition voters. It implies a bigger victory for the Tories and a stronger pound.

Results schedule

  • 21:00 GMT Voting ends and that’s when we get the exit polls. This is a big moment and it comes at a time of thin volatility when trading is only active in Australia and New Zealand. With the first indication of the vote coming on thin liquidity, we could see wild swings in GBP/USD.
  • 23:00 Initial real results: Sunderland usually reports first. We could see if the exit polls are indeed correlated with the frist real results. Trading volume is still low.
  • From 00:00 Tokyo open and a flood of real results. Trading volume already picks up and the data begins flowing more rapidly. Each constituency will report the winner and we will begin to get the composition of the new parliament. The picture will become clearer with every results and markets will react in full force.
  • By 5:30 Results should be clear if they were not clear beforehand.
  • 7:00 European market open and the full reaction is due.

Trading the election results – three scenarios

  1. Slim CON majority: The baseline scenario is for the Conservative Party to win some 350 seats, above 326 needed for an absolute majority. A 6-7% lead on Labour would probably be sufficient for this outcome. This will be a sigh of relief for markets that generally hate uncertainty and prefer the pro-market Tories. GBP/USD could move up. However, this is mostly priced in. After an initial rally, we could see a “buy the rumour, sell the fact” response. A return to square one still leaves us with internal opposition to May, prospects for a Hard Brexit and a slowing UK economy. So, this scenario could be an opportunity to sell the pound.
  2. Landslide CON victory: The original elections scenario would out May’s party with over 400 seats and a margin of over 10%. The pound could rally and continue rallying on hopes for a softer Brexit given weaker internal opposition and the knives coming out on Corbyn in the external opposition. A lot depends on the actual stance on Brexit.
  3. Hung parliament: The “nightmare scenario” is one of a stunning comeback by Corbyn. Even if the Tories get more seats than Labour, falling short of 326 means that anything is possible: a coalition led by May, a coalition led by Corbyn or another round of elections. The knives will be out on May and the political turmoil could last for quite some time. In this scenario, it would not be exaggerated to expect a fall of 300-500 pips in GBP/USD. However, if the new government includes the pro-Remain Lib-Dems and the pro-Remain SNP, the pound could bounce back up after the initial mess.

GBP/USD levels to watch

Given the high uncertainty and inconsistent polls, many technical lines can be broken.

Starting from the very top, 1.35 is the post-Brexithigh and a round number. 1.3250 worked as resistance in the past. 1.3130 is the immediate resistance level above the current cycle high of 1.3050.

1.2980, 1.29, 1.2840 and 1.2770 are all lines that worked as support and resistance in recent weeks.

1.27 is the first level outside the post-elections announcement range. It is followed by 1.2615, 1.2540 and 1.2350.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

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