The pound shows increased volatility against the dollar. The GBP/USD pair was at the bottom of the 28th figure yesterday, that is, at 5-week price lows, while the bulls are approaching the 31st price level today. Nearly 300-point price swings are relatively rare even for a pair like the pound-dollar. Therefore, it is necessary to understand the reasons for such volatility in order to assess the future prospects for GBP/USD.
As a rule, the British currency reacts so sharply to news related to Brexit. Negotiations between London and Brussels are ongoing, so positive signals from this front could well provoke a growth impulse on the pair. But this time the dollar was the main culprit in the GBP/USD volatility. Presidential elections are taking place in the United States today, so all of the greenback's hesitations should be viewed through the prism of this fateful event. In the context of the presidential election, the US currency is seen as a defensive asset. And the higher Biden's chances of an unambiguous and undeniable victory, the lower the market's interest in the dollar, as well as in other protective instruments. This explains the current dynamics of dollar pairs - the greenback is losing ground (to one degree or another) in almost all of them, and most actively it concerns the GBP/USD pair.
The fact is that the first news from the polling stations speaks of the advantage of the leader of the Democrats. According to the American press, Trump is ahead of Biden in several key states, but Joe Biden remains in the lead. Thus, the current US president is slightly ahead of his opponent in three key states. The head of the White House is leading in Ohio (47.4% versus 46% for Biden), North Carolina (47.8% versus 47.6%) and Iowa (47.6% versus 45.6%). However, Biden is ahead of Trump in Pennsylvania (48.7% versus 47.5%), Florida (47.9% versus 47.0%), Michigan (50% versus 45.8%), Arizona (47.9% versus 47 .0%) and Wisconsin (51% vs. 44.3%). According to the majority of experts, the most important victory is in two states - Pennsylvania and Florida - therefore the market reacted to the above news with a sell-off of the dollar. The defensive asset turned out to be unclaimed, while the interest in risk increased. The market regards Biden's victory as a signal for more significant fiscal stimulus and better international relations (primarily with China), so the US stock market is growing, while the greenback's status as a safe-haven is decreasing.
But traders should be warned against premature trading decisions, especially against the US currency. The current situation is fraught with many pitfalls, many of which can radically change the mood of investors. Firstly, the above figures are not the results of the vote count, but the results of a poll conducted by the RealClearPolitics resource literally on the eve of voting day. Second, nearly 60 million American voters chose to vote by mail. The process of counting mail ballots is slower (compared to live ballots from polling stations), while according to statistics, remote voting is more preferred by supporters of Democrats. This means that on the night of the counting of votes (the period of the European session on Wednesday), Trump may take the lead. Accordingly, the dollar will strengthen again - also against the pound.
Thirdly, the very fact of Biden's victory does not guarantee further growth of GBP/USD. In this case, everything will depend, firstly, on how far the Democrat will defeat the Republican, and secondly, on the position of Trump himself. The greenback will be under pressure if Trump admits his loss and quietly, peacefully, nobly prepares for the transfer of power. But if Biden's victory is not convincing, the incumbent president may get involved in a legal battle, challenging, in particular, the results of the mail vote (earlier he had more than once this method of voting, pointing out possible falsifications).
It is worth recalling here that in 2000, when George W. Bush and Al Gore were contenders for the presidency, the country lived in limbo for several weeks. The elections were held on November 7, and the name of the new president was determined only on December 12. Moreover, it was not the election commission that said the decisive word, but the US Supreme Court. According to a number of American experts, Trump may repeat this path, plunging the country into a regime of political uncertainty. In other words, if Trump's reaction to Biden's victory is belligerent, then the dollar could once again regain its status as a favorite in the foreign exchange market.
Thus, the growth of the GBP/USD pair is fragile and should not be trusted. The dollar is in limbo, while many investors make hasty conclusions, getting rid of the greenback. History knows several examples when pre-election polls did not justify themselves. For example, this happened in 2016, when Hillary Clinton was leading at the national level, but in the end she lost to Donald Trump. Such is the specificity of the electoral system in the United States. Whether Trump will be able to repeat such a somersault is an open question. Therefore, it is too early to write off the US currency.