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Snap General Election Breathes Life into the Pound

Yesterday morning, the UK Prime Minister Theresa May kick started a day of GBP volatility after her shock decision to call a snap general election for June 10th.

Although the Conservative Party currently holds the majority in parliament, recent polling numbers have suggested that they will increase this majority in the general election. With some political parties, still against Brexit and a cloud of doubt surrounding the kind of deal the UK will reach with the EU, a larger majority will help strengthen the negotiating position of May when trying to achieve the best possible kind of deal.

The vote in the Commons to approve the proposal for a snap general election instead of a 2020 election will require more than 2/3 of votes to pass. Some opposing parties have shown their support for the decision and the proposal is expected to pass.

Uncertainty surrounding the platform outside No.10 resulted in GBP/USD initially plunged around 80 points. However, this was followed by a dramatic reversal when the Prime Minister announced the general election, sending Cable surging around 390 pips, hitting the highest level of 1.2904 since October 3, and marking the biggest intra-day volatility since January 17.

The surge was helped by market expectations that the Conservative Party would become the massive majority in the parliament after the election, and that the UK would be in a stronger position during the Brexit negotiations, which would provide greater support for the Pound.

EUR/GBP fell from the psychological level at 0.8500, hitting the lowest level of 0.8312 since December 5, marking the biggest intra-day fall since November 9.

Volatility is expected to remain somewhat constant around GBP as the pace of Brexit begins to ramp up, with the EU and Theresa May both trying to secure the best possible deal in what could be a very messy divorce.

A result of the surge of GBP was a slump in the FTSE 100 index, hitting the lowest level of 7109 since February 2, with the strengthening of GBP weighing on exporters. The mining sector in particular felt the brunt of the strengthening GBP and was one of the worst performers.

In other news, the dollar has continued to weaken since Trump made the second USD overly strong statement. Tuesday EUR/USD hit the highest level of 1.0735 since March 30.



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