Pound Turns Bullish as Market Prices Conservative Win

Pound Turns Bullish as Market Prices Conservative Win

 
As news of Labour party closing the gap with the Conservative party came in, the market started hammering the Pound in mid-May. The Pound lost against most of the G-10 currencies, including the Canadian dollar. Higher than anticipated GDP growth in March also aided the Canadian dollar to strengthen against the Pound. Anticipating such a sharp decline, on May 24th, we had expressed our interest to go short in the GBPCAD pair at 1.7530, with a profit target of about 1.7270. We had also mentioned our interest to invest in a put option valid for a period of one week. The GBPCAD pair moved down as forecasted and resulted in a profit from both the trades. However, after hitting a low of 1.7176 last week, the pair has bounced back to 1.7400 levels. We expect the uptrend to continue in the days leading to the UK election due to the reasons mentioned below.

After OPEC and Russia agree to extend the curb on oil production, the crude price crossed above $50 per barrel. However, it was unable to sustain above $50 due to an increase in production by Nigeria and Libya. Additionally, the oil rig count in the US has increased for the 19th consecutive week. The number of oil rigs in the US is currently 1001. According to Mathew Ashley of Blackwell Global, crude oil may drop to $45 per barrel in a relatively short span of time. Last Friday, Statistics Canada also reported a trade deficit of C$0.40 billion, versus analysts’ estimates of a nil trade deficit. As crude price declines, the deficit would increase as oil accounts for a major share of Canada’s export revenue.

The Pound, as of now, is driven mainly by election related news. The market still prices a comfortable win for the Conservatives. After taking into account all the latest polls, Electoral Calculus, a political forecasting website, has determined that the Conservatives would still finish the election race with a majority of 72 seats. A comfortable majority for the Conservatives would make it easier for Theresa May to handle the Brexit negotiations.

Additionally, a clear majority would avoid another general election in 2020. That would ensure a smooth transitional phase for the economy, after the UK makes an exit from the EU in 2019. Thus, we can expect an increase in volatility to favour the Pound’s uptrend in the days to come.

Technically, the GBPCAD pair is moving along the ascending channel as shown in the image below. The bullishness is also confirmed by the ascending momentum indicator. Thus, an upswing toward the next resistance level of 1.7580 is expected.

GBPCAD - Technical Analysis - 7th June 2017

In order to gain from the uptrend, we are planning to go long in the GBPCAD pair near 1.7360. To negate risk, a stop loss order would be placed below 1.7260. The take profit level for the trade is about 1.7580.

In our binary trading account, we may consider buying a call option valid for a period of seven trading days. The strike price for the trade would be about 1.7360.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.


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