What comes next after the election
Cable has become a poll tracker since the UK's December 12 General Election was announced. GBP/USD has traded between 1.2750 and 1.30 since the middle of October.
The downside is limited by expectations that Boris Johnson will win a majority and thus be able to implement his Brexit plan. But the upside is capped by the memory of past elections and the referendum itself; polls don't have the best track record of late as far as accuracy is concerned.
The current state of play is that anything suggesting the Conservatives are on track to win a solid majority is sterling positive. Markets have risen on the back of several of these polls. A fresh batch is published every weekend, making Mondays a busy day for cable traders.
Indications that Jeremy Corbyn's Labour is likely to win enough seats to prevent a majority, or enter coalition with the Liberal Democrats, will hammer the pound.
Of course, there's plenty happening on the dollar's side too to drive volatility. The Federal Reserve isn't expected to cut rates again, which is also helping to limit sterling upside.
On the other hand, the US seems to be moving closer to a trade deal with China, and this has sapped demand for the safe-haven greenback. Some of the domestic data isn't supportive, either; the US is in a manufacturing recession, although the UK can also pull out a poor raft of PMI numbers.
Does a Conservative majority end Brexit uncertainty?
The pound may be stuck in a range for the time being, but what happens after the election? GBP/USD will likely find strong bid on a Conservative majority and could break through 1.30 even before the election date if the signs continue to point towards this.
But any relief at having seen off the threat of Corbyn or at having avoided further Brexit uncertainty could be short-lived as the markets turn their attention to the upcoming trade negotiations with the European Union.
It's taken the UK three and a half years to sort out the first phase of this process, and in that time, things narrowly avoided descending into chaos on several occasions. Trade talks could promise more of the same.
One of the biggest factors for sterling bears is the fact that the risk of a no deal Brexit won't be entirely negated even if Johnson manages to get the Withdrawal Agreement through Parliament by January 31st.
The Prime Minister has already promised that he won't extend the transition period - a grace period during which the UK will remain bound by EU laws while the two sides forge a trade deal - beyond December 31st 2020. Which means the UK could still end up reverting to WTO rules.
There is a provision to extend the transition period by two years to 2022. Given how the past three and a half years have unfolded, it already seems likely that MPs opposed to Brexit will push for that extension - whether they have the numbers to make it happen will be decided on December 12th.
It's worth remembering that Johnson also promised not to extend the Article 50 process beyond October 31, but due to legislation forced through by rebel MPs he was compelled to do so. It's hard to believe that Parliament is going to be any more cooperative during negotiations around trade.
Which means that the pound could see a sharp bounce in the wake of the election and remain supported as the January 31 deadline approaches - if Johnson's plan remains on track - only to drop lower again as the reality dawns that we've got at least another year of Brexit uncertainty to look forward to as phase two begins.
This article was submitted by Markets.com.
