GBPUSD is trading above the 1.32 mark, its highest level since March, as markets expect a Conservative victory in today’s UK election. An outright Conservative majority is set to break the Brexit impasse within Westminster, enabling the UK to leave the European Union by January 31. Should the official result fall in line with market expectations, any gains for GBPUSD are likely to be capped around 1.35 considering that much of this result has already been priced in. The polling stations close at 2200 GMT, when we also get the exit polls, which have historically been a reliable indicator for general election results.
Still, that doesn’t mean the UK election result is a done deal, considering that the UK political arena has thrown up huge surprises in recent years. A hung parliament or a surprise Labour victory could result in Sterling rapidly unwinding recent gains and falling back towards the mid-1.20s against the US Dollar.
Dollar weakens as Fed set to stand pat on US interest rates in 2020
The Dollar index (DXY) has weakened towards the 97 psychological level, taking its year-to-date gains to less than one percent, after Fed chair Jerome Powell signaled that the central bank is set to keep US interest rates unchanged through 2020. With the Fed seemingly raising the bar on US interest rate hikes, that leaves Dollar bulls with one less leg to stand on.
The DXY’s 2019 gains could come under further pressure if markets see another significant bout of risk-on sentiment However, should the Pound see a steep decline on either a hung parliament or a shock Labour victory, that could help alleviate the downward pressure on the Dollar index over the near-term.
Tumultuous Thursday ahead?
Besides the UK elections, there are other key events today that also warrant investors’ attention. The European Central Bank is set to make a policy decision, the first under its new President Christine Lagarde. Even though investors expect the bank to leave its current policy settings intact at this meeting, any clues on future policy direction from Lagarde could greatly influence the Euro’s outlook, considering that the new ECB President has already announced a policy review. Lagarde’s style and tone of communication will be key things to watch.
The signing of the ‘phase one’ US-China trade deal will continue to act as the primary driver for global market sentiment, as US President Donald Trump is reportedly set to meet his trade team today. Any indication of an agreement would be another shot in the arm for risk assets, although the unpredictability of US-China negotiations ensures that a sudden selloff in risk assets cannot be fully ruled out.