Nick Goold
The United Kingdom general election, scheduled for Thursday, 4 July 2024, is expected to generate many trading opportunities across various markets. From short-term speculators to long-term investors, traders can anticipate significant movements in GBPUSD, GBPJPY, and the FT100 index.
This article will explain the strategies you can use before and after the election to capitalize on the upcoming market volatility. Understand how this pivotal political event can shape your trading decisions and enhance profitability.
Why is it important
The United Kingdom's general election is important for financial markets due to the potential for significant shifts in economic policies resulting from a change in leadership. When a new government takes office, traders and investors anticipate adjustments in fiscal policy, regulatory frameworks, and public spending priorities, which can lead to considerable market volatility. These expected changes drive market participants to change positions, leading to potentially significant movements in markets related to the United Kingdom.
While the Bank of England's monetary policy is crucial, general elections generate significant market interest due to their rarity and potential impact on economic policies. Traders closely monitor election outcomes, with GBPUSD, GBPJPY, and the FT100 index the markets most likely impacted. Anticipated policy changes can lead to sharp asset price movements, offering trading opportunities for both short-term and long-term traders. Understanding the implications of the UK general election is essential to be prepared to profit from this rare opportunity.
How Could the Election Impact the Markets?
Polls suggest that the centre-left Labour Party could return to power after 14 years, a prospect with significant implications for financial markets. According to current polls, a Labour victory looks highly likely, and the markets appear relatively calm, having already priced in this outcome.
Should the gap between the two main parties narrow leading up to the election, volatility will increase, and the GBP and FT100 index will likely fall. The most significant risk is where no party has a majority, where uncertainty over coalition formation could significantly weaken the pound.
Polls suggest that the centre-left Labour Party could return to power after 14 years, a prospect with significant implications for financial markets. According to current polls, a Labour victory looks highly likely, and the markets appear relatively calm, having already priced in this outcome.
Should the gap between the two main parties narrow leading up to the election, volatility will increase, and the GBP and FT100 index will likely fall. The most significant risk is where no party has a majority, where uncertainty over coalition formation could significantly weaken the pound.
Labour Government
Labour's leadership, including Shadow Finance Minister Rachel Reeves and party leader Keir Starmer, has emphasized fiscal discipline and reducing the national debt as a share of GDP. This pro-business, center-ground stance has increased investor confidence. A Bloomberg poll found that 44% of professional investors view a clear Labour victory as the most market-friendly outcome, compared to only 25% who favour an outright Conservative win. The GBP and FT100 could strengthen if Labour secures a majority, reflecting market optimism about stable governance.
Coalition Government
A coalition government, however, presents a different scenario. A hung parliament is likely the most disruptive outcome for the UK financial markets, with Labour-led coalitions more probable than Conservative-led ones. The prolonged uncertainty over coalition formation could weaken the GBP and FT100 significantly.
Additionally, coalition governments often struggle to reach a consensus, which might dilute Labour's pro-business stance or raise other concerns, such as the possibility of Scottish independence if the SNP gains significant influence. These factors could lead to further losses for the pound, emphasizing the importance of a clear election outcome for market stability.
Markets to Trade During the Election Period
Trading during the UK election period can present numerous opportunities, and three of the best markets to focus on are GBPUSD, GBPJPY, and the FT100 index.
GBPUSD: This currency pair is closely tied to the UK election, enjoying narrow spreads that make it easy to trade. Recently, GBPUSD has been range-bound, indicating a potential for increased volatility as election results approach.
GBPJPY: Known for its volatility, GBPJPY can offer greater opportunities for short-term traders than GBPUSD. The yen's volatility adds an extra layer of trading potential during the election period.
FT100: The UK stock market index provides various trading opportunities for both short-term and long-term traders. The UK stock market has lagged behind the US so that a favourable election outcome could lead to a significant rise in the FT100 index.
UK Election Impact on Markets: Historical Insights
2019 Election: Thursday, December 12 2019
The 2019 UK general election on December 12 saw Boris Johnson's Conservative Party secure a large win, their best performance since 1987. Initially, the pound surged as markets hoped for a resolution to Brexit uncertainty. However, the pound's strength did not last, impacted by the pandemic, Brexit issues, and Johnson's removal in 2022.
2017 Election: Thursday, June 8 2017
In 2017, Prime Minister Theresa May's snap election backfired, erasing her majority and forcing an alliance with Northern Irish parties. This unexpected result caused UK currency to fall, highlighting the uncertainty elections can bring to the markets.
2015 Election: Thursday, May 7 2015
The 2015 election saw the Conservatives secure a majority, initially boosting the pound. However, Brexit's 2016 announcement led to the UK currency dropping over 6% against major currencies within a year.
2010 Election: Thursday, May 6 2010
The 2010 election resulted in a no majority, causing the pound to fall significantly. Nick Clegg's rise during debates contributed to this uncertainty, emphasizing the market's preference for clear outcomes. Importantly for the upcoming election, the 2010 election led to the UK's first hung parliament since 1974.
Trading Strategies
Ahead of the Election: Short-Term Trading
Range trading profits from volatility and market overreactions
As the election approaches, market volatility will likely increase. Headlines regarding polls can cause overreactions, making it beneficial to trade against the initial price movements and engage in range trading during these scenarios.
An effective strategy to capitalize on these market overreactions is to use a 5-minute chart for range trading. When you notice a large gap—such as more than 10 pips—from a 10-bar moving average, it presents a trading opportunity. Enter a trade by buying if the price gap is below the moving average and selling if it's above. It's crucial to wait for a confirming signal that the market is beginning to revert to the mean. This confirmation could be an up bar for buying or a down bar for selling. The goal is to exit the trade and take profits as the price returns to the moving average, capitalizing on the temporary market irrationality.
Short-Term Trends
Apart from news events, short-term trends may become stronger than usual. Look for opportunities where short-term moving averages are significantly higher or lower and follow the trend. Always use a stop loss, as the potential for large moves is higher during this period.
In the chart below, you can see that the moving average is indicating an upward trend and providing support. Buying or selling ahead of a strongly pointing moving average, whether it's trending higher or lower, is a good way to follow trends. Exit the trade when the market closes below the moving average.
On the Election: Reacting to Results
Immediate Market Reactions
Once the election result is known, expect a strong move in one direction. If Labour wins, markets might move higher; if there is a hung parliament, expect a significant drop. Try to follow this move, but avoid chasing it if the market moves too quickly. Instead, wait for a pause to join the trend.
After the Election: Long-Term Trends
Post-Election Trends
Following the election, currency and stock markets might develop new uptrends, especially given the underperformance over the past few years. If a clear trend emerges, look to follow it for potential gains. This period could provide substantial opportunities for long-term traders aiming to capitalize on new market dynamics.
Reading Market Sentiment
Read news reports to gauge traders' reactions and market sentiment. This can help you better understand the market's direction and make more informed trading decisions.
Why You Need to Trade The UK Election at Titan FX
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