FX swings expected as the UK heads to the polls

As the UK goes to the polls today, Brett Thomas, Head of Dealing at Godi Financial, considers what this means for the FX markets.

Such has been the pattern of events over the past 12 months, it is perhaps unsurprising that we head into yet another major political event in which uncertainty reigns supreme.

The result of the UK General Election, much like the EU Referendum and US Presidential race before it, still remains in the balance. Arguably the Conservatives, despite performing horribly since calling the snap election, still remain in the ascendancy and are the bookmakers heavy favourites to remain in Government, but it is their ability to win a ‘workable’ majority that is currently in serious doubt.
 
When PM Theresa May called the snap election on the 18th April, the pollsters had the Tories streets ahead of their main opposition Labour party, some by as much as 25 points. On the back of the announcement Sterling rallied aggressively in FX space, with the Pound jumping some 4 cents against the US Dollar, and to a fresh 2017 high of 1.2000 against the Euro. Clearly the perceived certainty and stability that a Conservative majority could provide the UK for the upcoming Brexit negotiations was well received by markets and investors alike. Now, Just some seven weeks on, the outlook has changed dramatically. Jeremy Corbyn and his Labour party now look like a credible opposition and have a genuine chance to win the election, and that has been reflected in the narrowing of the polls. The latest Survation poll in fact has the Tories just one point ahead of Labour. Coinciding with the narrowing of the polls has been a sizeable slide (weakening) in Sterling currency pairs, as investors and markets become twitchy as to the outcome. As we always reiterate, financial markets like certainty and that lack of certainty has been reflected with the fall in the Pound.   
 
Whilst the election is riddled with uncertainties, one thing we can predict with certainty is that there will be volatility in currency markets today as the UK goes to the polls. There will of course be rumours and whispers coming through over the course of today and up to the closing of the polls at 10pm, but it will be the Exit poll shortly after that which will give our first real indication of the likely result. In the 2015 General Election, the Ipsos Mori exit poll correctly predicted the large Tory lead.
 
There have been a number of predictions and forecasts from big financial institutions and banks as to how Sterling could react, based on a number of Election outcomes. Please find below a prediction issued by Westpac Banking Corporation yesterday (Wednesday 7th June). Whilst no one can of course know for certain how things will play out, I think this offers a fair estimation:

Labour Majority: GBP/USD 1.1900-1.2000
Conservative Win but Hung Parliament: GBP/USD: 1.2200-1.2500
Conservative Win – ‘workable majority’ (20-40 Seats): GBP/USD 1.3000-1.3200
Conservative Landslide (75-100 Seat Majority): GBP/USD 1.3500

*GBP/USD Headline Rate at the time of writing: 1.2950  

 
Quite simply a Tory win with a majority should in theory at least see Sterling bolstered in the FX space, and the degree to which it strengthens will be dependent on the size of the majority. I think this is a fair and obvious assumption when we look at the recent relationship between the narrowing polls and decline in sterling.
 
On the other side of the coin a hung parliament or Labour majority could see a dramatic fall in sterling as it would bring a great deal of uncertainty to proceedings, which is amplified ten-fold with Brexit negotiations immediately on the horizon. Whilst Westpac suggest a Labour majority could be far worse for the Pound, I’m not entirely sure I agree with that as at least in that scenario the UK would have a one party government ready to do battle with Europe. The prospect of a hung parliament and potential Labour-SNP coalition would offer a far worse prospect for me personally.

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