GBP/USD: (Russian) Bears Are in Play

FXStreet  |

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  • GBP/USD has been losing ground amid election uncertainty and trade optimism.
  • Services sector figures and further speculation about voting are set to dominate trading.
  • Tuesday's four-hour chart is showing a worsening technical situation for GBP/USD.

Is Prime Minister Boris Johnson covering up a report about Russian intervention in UK politics? That is what the opposition claims in the latest battle ahead of the December 12 elections. Britain's intelligence services have investigated meddling by the Kremlin, but No. 10 refuses to publish the results. The report may reveal ties between the Conservative Party and Russians.

Uncertainty about the elections is weighing on the pound. Opinion polls continue showing the Tories in the lead, but far from guaranteeing an absolute majority. Markets prefer the certainty of Johnson's Brexit deal over uncertainty and having hard-left Jeremy Corbyn installed in Downing Street.

Both main parties are clashing about Brexit but also about the National Health Service. Johnson's pledges to bolster the NHS place him in the territory, usually dominated by Labour. Moreover, changing the main topic from Brexit to health may hurt his chances – just as they hurt his predecessor Theresa May's 2017 campaign.

Trade optimism, upbeat services sector

GBP/USD has also been struggling due to US Dollar strength, stemming from optimism about US-China trade talks. Officials in Washington and Beijing have been upbeat about the negotiations. Reports suggest that the US may be willing to accept a Chinese request to remove the latest round of tariffs, perhaps in return for a signing ceremony on US soil – allowing President Donald Trump to claim victory.

The Markit/CIPS Purchasing Managers' Index for the services sector has come out better than expected – at exactly 50 points – the threshold that separates expansion from contraction. The UK's largest sector is outperforming construction and manufacturing, which are contracting according to the forward-looking index.

The focus now shifts to the US ISM Non-Manufacturing PMI, which is expected to advance within the growth territory.

GBP/USD Technical Analysis

GBP USD technical analysis November 5 2019

Momentum on the four-hour chart has turned negative, and GBP/USD is struggling to hold onto the 50 Simple Moving Average. However, the currency pair is holding above the uptrend support line and trades above the 100 and 200 SMAs.

Overall, bears are gaining strength, but are far from taking over.

Support awaits at 1.2875, the daily low, which converges with the 100 SMA. Below the uptrend support line, the late October low of 1.2785 is another cushion. Close by, 1.2750 capped pound/dollar on its way up, and 1.2705 was another swing high in early October.

Resistance awaits sterling at 1.2910, which held it down in late October and also early in the day. Next, 1.2950 capped the currency pair in early November, and 1.2975 was a swing high in late October. The five-month high of 1.3013 towers above.

Background: How the UK elections impact sterling?

Brits are going to the polls on December 12, in the first Christmas election in nearly a century. The snap election was called after parliament seemed to be in a deadlock about Boris Johnson's Brexit deal. The PM also desired to capitalize on his Conservative Party's lead in the polls.

The Liberal Democrats and the Scottish National Party also desired to take advantage of their new momentum and their decision to back elections may have influenced France to allow for a three-month delay of Brexit. That extension came as a relief to those fearing a no-deal Brexit.

Markets generally want to see a landslide victory for the Tories, the party of free markets, despite its ambitious spending plans. Moreover, a victory for Johnson would likely secure the ratification of the Brexit deal and provide further certainty.

A victory for Labour – probably with the support of other parties – is a scenario markets fear. Opposition leader Jeremy Corbyn has proposed the nationalization of infrastructure and may be unfriendly to business. Moreover, he aims to renegotiate the Brexit deal. While Labour's Brexit may be a softer one, the ongoing issue may weigh on markets.

Nigel Farage's Brexit Party is set to compete across the country and may undermine the Tories' chances of an outright victory. All parties have to submit their candidates by November 14 – four weeks ahead of the elections.

Overall, a Conservative majority is pound-positive, while the prospects of Corbyn at No.10 are pound-negative.

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Equities Contributor: FXStreet

Source: Equities News

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