Gold intermarket: UK elections supporting gold, fade the risk rally?

The UK elections have proven to be a nightmare, so far, for the Conservative party and the status quo. Gold attracts safe haven demand during times of uncertainty. USD/JPY is lower trading below the 110 handle having marked a low of 109.70. 

Exit polls: "Can't see how that's helpful for the pound" - Socgen

As with the Brexit and US surprise outcomes, gold was actually good two-way business and much will depend on how the markets will digest whatever the outcome of these elections. The implications are wide as the Brexit scenario along with a UK parliament in disarray again is supportive of a risk-off tone. There are a number of scenarios that could be considered as either negative or positive for the pound and also the yellow metal on a proxy trade. 

The following scenarios might be considered for the pound and the divergence of risk through gold that could be argued to move in the opposite direction to Sterling:

• Conservative victory with Absolute Majority (Scenario 1) - A Conservative victory with an absolute majority should be supportive initially for the pound, (bearish gold). Stock markets would be relieved on the lower corporation tax outlook and a risk-on environment could be the expected outcome. However, with a focus on Brexit and PM May's hardline - "No deal is better than a bad deal" - approach to the negotiations, a hard Brexit outlook could equate to a bearish scenario to the pound eventually - (Note: Remain cautious of a 'buy the rumour sell the fact' trade - a Conservative victory had been priced in).
• Conservative victory without Absolute Majority (Scenario 2) - With the narrowing of the polls and a trend that has been continuing, the possibility of a hung parliament should not be ruled out, (When no party has won enough seats to have a majority in the House of Commons). Such an outcome could be highly bearish for the pound (bullish gold) due to the uncertainty for markets to deal with. However, in a hung parliament, the incumbent prime minister stays in office until it is decided who will attempt to form a new government - this could support the pound after an initial sell-off. (Note: A hung parliament does NOT necessarily mean a coalition government). 
• Laborist victory (Scenario 3) - A balanced outcome for the pound and gold with initial volatility on the basis of Labour’s manifesto. Initially, a lower pound could be the immediate outcome bias due to increased uncertainty and a reduction of inflows (bullish gold). However, a Labour victory should mean a softer Brexit outlook and austerity would be removed, (Fiscal easing lifting growth and inflation expectations). Higher real yields may offset the initial weakness in the pound (bearish gold).

Gold levels

Gold looks to be holding back while the results come through during the night. Markets do not wish to be too speculatively positioned either way. The yen is consolidating and gold has met a high just below the 1,280 key psychological level. On a hung parliament, you might expect a test of 1281, the pre-exit polls high. 1,284 on the wide to the upside and 1275 to the downside are key levels.