UK General Election Preview: what to expect from this week’s UK election

What are the key market themes to watch out for during the UK election?

Will Boris get his Brexit mandate?

As far as market participants are concerned, this election is about Brexit, and whether UK Prime Minister Boris Johnson can win a mandate for his withdrawal agreement with the European Union. And based on recent polling, as well as the behaviour of financial markets, this mandate ought to be achieved. Recent polling has suggested that the UK Conservative Party remains well ahead in the election race, with betting company Betfair assigning an 80 per cent chance of a Tory majority government. That’s all music to traders’ ears, who have pushed the GBP/USD to two-and-a-half year highs in anticipation of this result.

What for the UK economy in 2020?

A resolution to years of Brexit uncertainty is undoubtedly a good thing for the UK economy. Nevertheless, some concerns will inevitably remain about Britain’s economic health going forward. Years of confusion regarding Brexit, along with some global headwinds, has seen the UK’s fundamentals soften recently. GDP growth is at a paltry 1.0 per cent, inflation has dropped to 1.7%, and although the unemployment remains low at 3.8 per cent, the rate of jobs growth in the UK has slowed. On top of this, some level of policy uncertainty is likely to persist post-Brexit, as the UK seeks to negotiation new trade agreements with its trading partners.

What does it all mean for Bank of England policy?

The market appears divided on whether the UK economy will require monetary policy support. On the one hand, the end to years of Brexit uncertainty that would come with the (assumed) Conservative government victory would likely lead to a boost to investment and consumer confidence. On the other hand, Brexit risks don’t completely disappear. Domestic fundamentals are soft, and the UK is still being confronted by with headwinds currently inflicting the broader global economy. As it stands, traders have implied in the interest rate futures curve a roughly fifty-fifty chance of a Bank of England rate cut by the end of 2020.

How could the UK election impact the financial markets?

Great British Pound

The GBP/USD has been in a steep uptrend since September, when the first signs emerged that the UK and EU were on the path to a Brexit-deal. And momentum clearly remains skewed to the upside for the Cable. The RSI is holding onto “overbought” territory, and the 50-day EMA and 200-day EMA have formed a bullish “golden cross”. The GBP/USD sits just below a resistance level at 1.32 now. A confirmed Conservative majority government would probably see this level break, and drive the GBP/USD towards the 1.34 level. Conversely, a surprise Tory loss, or even a Tory minority government, would probably see the pair plunge into the mid-1.20s.

FTSE100

The FTSE 100 often trades counter to moves in the GBP. That’s because it’s a highly export sensitive market. Hence, although a Tory win would be considered good for UK equities fundamentally, especially given its relatively attractive valuations, in the short-term, it could lead to a drop in the country’s benchmark stock index. In the longer term, however, the FTSE100 ought to benefit from the better economic fundamentals that would likely stem from the passing of a Brexit deal, especially the BOE holds onto a dovish policy bias. Key support exists for the index around 7000, while key resistance can be found at around 7450.