UK PM May called a snap election which sparked a GBP rally. The bullish sentiment was fuelled by GBPUSD breaking key tech levels which was spurred on by momentum supporting the move, a short squeeze on extreme short GBP positioning and traders interpreting the snap election as a positive outcome for the UK.
Why a snap election?
An election on June 8 provides PM May a stronger platform to push her own electoral mandate, strengthens her position when negotiating a Brexit deal and dilutes the influence of those within parliament pushing for a hard-Brexit.
Outcome for GBP?
A snap election strengthens our view that GBP has further upside. Although elections inherently increase risk in this case we view this risk as acceptable given a snap election avoids elections being held in the future around key Brexit negotiation dates.
Risk to our bullish GBP view?
PM May has timed the snap election perfectly. The main risk to our bullish GBP view is if structural factors start to soften UK data resulting in a materially weaker UK economy. PM May most likely avoids this risk by holding an election sooner rather than later.
Over-crowded short positioning
Positioning heading into the snap election was heavily short. Using the first level we can see that net positioning had reached extremes due to traders building shorts. Adjusting for open interest in the second level positioning is still at extreme short levels and is susceptible to adjustments. As a result when GBP did rally these shorts were squeezed out of the market.
Key Tech levels breached
GBPUSD closed above the 200DMA and broke through both key resistance levels 1.2775 and 1.27. We see further upside and would use retracements to key support levels as an opportunity to enter long positions. A break below 1.2353 indicates to us that GBPUSD may not have established a base yet and there may be further downside.
GBP tends to outperform during periods of high risk and we see upcoming EUR risk events weighing on the EUR. We look for chances to enter shorts at resistance levels anticipating a break of 0.83. A breach of 0.8513 would make us re-evaluate our bearish stance.
GBPAUD broke the 200DMA as well as an important resistance levels. Our view is a base has been established and look to enter long positions.