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