FxWirePro Longer Term Outlook: Is pound bear trend over?

Yesterday, the pound opened trading at 1.256 against the dollar and the pair declined to as low as 1.251 as the UK Prime Minister Theresa May announced snap general election on June 8th. However, it not only recovered the lost grounds, the pair moved to as high as 1.29, only to retrace back to 1.284 by the end of the day. It cleared a key resistance around 1.27 area and the fierce break changed our short to medium term outlook in the pound. We now expect the pound to reach as high as 1.356 against the dollar with interims targets around 1.297, 1.305, and 1.32 against the dollar.

But does this move change our longer term outlook?

The answer is no. In July last year, we recommended a long-term call to our readers to short the pound at the then current rate of 1.346 against the dollar and at rallies with a target around parity. However, we were expecting corrections towards 1.4 against the dollar which did not happen.

So, why we say no?

The assumptions behind yesterday’s rally were that the Theresa May government would enjoy a decisive victory in June and that will strengthen UK’s position in the ongoing Brexit negotiations. It is also assumed that the election outcome would deliver stable governance until 2022, a long enough time to deliver Brexit.   

While the polls continue to favor Ms. May, we have learned in the recent past that polls can be deceiving.  Hence, the risk of a more unstable government is not null. In addition to that, the election can’t shield the United Kingdom from some of the Brexit attacks by the European Union and it doesn’t make the negotiations easy. While the election announcement is definitely an important fundamental change, it is not enough to change our longer-term bearish outlook in the pound.