UK Election: Risks for the pound - Westpac

Sean Callow, Research Analyst at Westpac, explains that the UK general election will be on Thursday 8 June and the pound seems set to be quite volatile as the results are revealed, with GBP/USD potentially anywhere from sub-1.20 to 1.35 in the most extreme scenarios.

Key Quotes

“The UK general election will be on Thursday 8 June. Polls close at 10pm Thursday UK summer time: 7am Friday Sydney, 9am Friday NZ, 5pm Thursday New York. Exit polls should give some guidance around this time, with actual vote counts thereafter.”

“Sterling remains quite sensitive to UK politics. When UK PM May announced a surprise early election on 18 April, GBP/USD jumped almost 4 cents to above 1.29. It extended above 1.30 in May, albeit with help from a softer US dollar. In this period, GBP/AUD rallied from around 1.65 to early May highs above 1.75.”

“Price action has made clear that the pound’s strength – at least short term - is positively correlated with the outlook for the current Conservative government. The common assumption when the election was announced was that the Tories were taking advantage of their very large lead in the opinion polls to substantially increase their current 17 seat majority in the 650 seat House of Commons. The sharp rise in the pound at that time matched optimism from PM May that the Conservatives would enjoy a comfortable majority that would strengthen Britain’s position throughout the Brexit negotiations and beyond.”

“Moreover, the Labour Party is running on a policy platform viewed as notably more radical – and less business-friendly - than under the Blair-Brown Labour governments from 1997 to 2010.”

“The Conservatives’ lead in the polls began to be trimmed from early May, with its primary vote in poll averages peaking at 49% on 7 May, falling to 40% by early June. Releases of polls showing a tighter race or even a hung parliament have produced knee-jerk falls in sterling.”

“A photo finish or a hung parliament remain only low probabilities. But even consolidation of the existing Tory majority – say 15-20 seats – is seen by some pundits as a poor enough performance by PM May to hamper her leadership and embolden MPs arguing for a “hard” Brexit.”

“Given this backdrop, the pound seems set for volatile trade as the results come in on Friday. The baseline scenario is for the Conservatives to retain a workable but not huge majority, which should prove modestly positive for the pound, at least initially. But as the Brexit vote showed, markets will need to consider what could happen in the event of a surprise result.”

“Scenarios and sterling’s possible initial response:

• Conservative landslide (75-100 seat majority): GBP/USD 1.35
• Conservatives win workable majority (20-40 seats): GBP/USD 1.30-1.32
• Conservatives win most seats but a hung parliament: GBP/USD 1.22-1.25
• Labour majority: GBP/USD 1.19-1.20

These scenarios would imply GBP/AUD’s potential ranges from 1.58-1.60 to 1.80 (AUD/GBP 0.5550 - 0.6300).”