The UK vote was only just announced but the market already cast a definitive vote for Theresa May in a huge GBP rally Tuesday. The pound was the top performer while the Canadian dollar lagged. A light Asia-Pacific calendar will give markets an opportunity to digest the big moves. The previous GBP short was stopped out. 7 out of the 9 existing trades are in profit, alongside the short FTSE-100. 1 trade missed the fill by 8 pips, awaits.
Cable soared to 1.29 from as low as 1.2520 in a perfect storm of news, positioning and technicals on Tuesday. The news was a June 8 snap UK election. With polls showing May’s party +20 points ahead and the opposition in disarray, she seized the opportunity to cement her position with a strong mandate. The market is already seeing a May win as a sure thing and is implying it will improve her negotiating position.
In terms of positioning, we have warned for weeks that GBP shorts are dangerously overcrowded. Last week’s CFTC data showed cable net shorts were near a record with almost have of the position already underwater. The rally Tuesday was no doubt helped by a squeeze but we’re confident there are many more GBP positions to be picked off.
Technically, the rally cascaded through multiple levels. The March high and 200-dma were the first to go, followed by the February high and finally the December high of 1.2775. Shortly after it broke, the pair went into overdrive in a flash trade up to the highs of the day.
Ashraf looks ahead to what’s next with his latest Premium trade.
Not to be lost in all the focus on the UK, the Treasury market continues to rally. US 10-year yields fell another 8 bps to 2.17%. While the election story is domestic, we believe the failure of the reflation trade is a global theme with broader consequences. It also raises the stakes for incoming inflation data.
