Theresa May Announces Snap Election for 8th June 2017


The UK Prime Minister surprised the markets this morning by proposing a general election for 8th June, highlighting the need to “secure a strong and stable leadership” which Brexit negotiations can be built upon. Jeremy Corbyn stated that he welcomes the Prime Minister’s decision, so despite the need for a two thirds majority MP vote (under the fixed term parliaments act) there appears little to stop the vote going ahead.

 

As it stands, the Conservative Party has a substantial lead over Labour in the opinion polls and would therefore expect a landslide victory in June. Aside from an extension to the conservative majority in Parliament, May will be hoping that the election will show strong support for her leadership and approach to the Brexit negotiations. The timing means that negotiations with Europe will still be in the infancy so the risk of a backlash from Europe damaging confidence in May’s administration is relatively small.

 

Another implication of extending the Tory leadership period is that it could allow more time for Brexit negotiations. It was previously assumed that Britain’s departure would have to be complete by the 2020 general election. However, if May is to remain in power until 2022, the Article 50 process could be extended to allow more time to iron out the finer details. Any such act would potentially be beneficial to both sides and allow for a softer Brexit which the markets seem to like.

 

In recent months, we’ve become accustomed to the pound benefiting from increased political certainty (sterling rose when Article 50 was finally triggered). Sterling has reacted positively to today’s news, climbing 1.6% against the dollar (see chart below) and 1.5% against the euro, as financial markets digested the possibility of a larger Conservative majority providing greater stability for Britain to work through the challenges of Brexit. Furthermore, assuming the election goes smoothly – and there is no reason to expect it not to – it should increase investor confidence in the UK economy.   

  

CHART 1 – GBP/USD 18 April 2017

 

Picture1

 

 

In contrast, the FTSE 100 is down 2% on the day although it should be noted that it opened down around 1% and the additional decline is almost certainly due to the rise in sterling (which reduces the value of foreign currency earnings for UK companies) as opposed to disappointment about the prospect of another election.

 

Stepping back, it is important to remember that GBP/USD has been trapped between 1.20 and 1.28 over the past six months (ignoring the flash crash in October) while GBP/EUR has traded between 1.13 and 1.20 since mid-November. At this stage, we remain cautious about getting too bullish on sterling’s immediate prospects. Whilst a break-out from this range could signal further short-term upside, we expect political twists and turns ahead of June 8th will continue to trigger volatility in the currency and keep it range-bound. Longer term, increased political stability via a larger Conservative majority would add further confidence to our long-standing view that sterling will continue its recovery.

 

CHART 2 – GBP/USD – Longstanding Range

Picture2

 

 

Author: Marc Cogliatti



 

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