FTSE 100: how will it move after the UK election?

Should the Conservative Party secure a majority on Thursday, the pound will likely soar higher, weighing on the FTSE 100 in the process.

Sterling continues to soar against the euro and the dollar, driven by the prospect of the Conservative Party securing a majority on Thursday that will put potentially bring an end to Brexit.

With the Tories commanding a strong lead ahead of the election on December 12, the GBP/EUR has risen above €1.19 and the GBP/USD has climbed to $1.32.

However, as sterling continues to rally ahead of the election, a strong pound has weighed on the FTSE 100 and will likely to continue to do so long as the Conservative Party comes out on top.

Brexit referendum offers blueprint for FTSE 100 trajectory

The 2016 referendum result provided markets with a clear gauge of how the FTSE 100 could act in the event of a sharp sterling move on Thursday.

The four-hour chart below highlights the initial decline in UK listed stocks, with the referendum result deemed to be a negative for the UK economy.

However, the trajectory of the FTSE 100 was ultimately determined by the huge decline in sterling, with the highly internationalised nature of the index ensuring that traders saw the benefits of a weak pound over the long-term consequences of Brexit.

Turning our focus to the current situation, the wider global market sentiment has been undoubtably bullish over recent months amid record highs in the US and a sharp recovery for the likes of the DAX and the CAC.

That should help drive the FTSE 100 higher IF we see sterling decline. The initial breakout level in such an event would be 7447, which would point towards a potential move towards the 7730 region.

Sterling could weaken if Tories fail to secure majority

Such a sterling decline would be likely if Johnson fails to gain a majority, despite the fact that we could see a second referendum held. However, with the pound gaining ground, markets widely expect to see a Conservative victory which would likely push the pound sharply higher.

Should that occur, watch for an inverse of the 2016 pattern, with a FTSE 100 rise likely reversed in response to a sterling surge. A break below the 6999 in particular would bring about a more bearish view for the index.

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