UK General Election 2017


This week sees the UK public going to the polls for the third time in two years following the EU referendum last year and the last general election back in 2015. Both the previous two events resulted in surprising outcomes and thus also drastic movements in GBP pairs.

 

At the point the general election was announced, 5 weeks ago, the outcome was a foregone conclusion with the Conservatives enjoying a 20+ point lead over Labour in opinion polls. However, since then, things have taken a downturn and although it is still anticipated for a Tory victory, the predicted margin has shrunk considerably in all polls, with some showing just a 3-point lead. This has some investors worried that another surprise outcome could occur again…

 

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Credit: electoralcalculus.co.uk

 

The risk to GBP is nearly all to the downside. A hung parliament would leave the country in real uncertainty, particularly regarding how Brexit negotiations will be carried out (and by whom) when they begin in a few weeks. Therefore, it would be expected for a sizeable weakening in GBP in the immediate aftermath, particularly against EUR, with volatility to remain high as talks of creating coalition occur.

 

The markets are likely to react badly in this scenario if the likely outcome suggests a Labour and SNP coalition that would put Jeremy Corbyn into number 10. Banks are already extremely tentative to their future in the UK depending on the terms of Brexit, so having a significant corporation tax increase (as well as personal tax increases) may be the final straw – some may choose the relocation option.

 

However, despite the lead narrowing and people becoming fearful of either a hung parliament or an outright Labour victory, betting markets have stayed relatively stable. Whilst some exchanges have shown a significant shrink in odds of a hung parliament, mainstream bookies still have a Conservative majority as the overwhelming likely outcome (over 80%).

 

Some interesting nuances have arisen with Betfair exchange having a hung parliament as the favourite, but following that is a Tory victory of 50-100 seats, implying that people are polarised between either no victory, or a massive one and discounting everything in the middle as less likely to occur.

 

There is definite merit to why, despite the big moves in the polls, the likelihood of a different outcome is still low.

 

  1. First and foremost the Tories still have a lead in most polls of between 5-10%, which would be the biggest winning margin since Tony Blair in 1997 who ended up with a majority of 179!
  2. Secondly (and more importantly) summarising the voting intention into a single statistic is quite misleading as in UK politics we elect based on individual constituencies. Due to this system, it is nearly an impossibility for Labour to end up with an overall majority on Thursday as long as the SNP dominates Scotland. Given the latest calculations show the Conservatives are more likely to steal SNP seats than Labour, this isn’t promising for their chances. People are no doubt saying that the 10-15% increase in Labour support over the last few weeks must pay off somehow, but unfortunately due to the electoral system that is not necessarily true. Analysis, by the Sunday Times, has shown that most of the increase is in seats already held by Labour. So what may happen is that they will win their safe seats potentially with margins of over 30% but in terms of actual seats in Parliament this will count for very little. What all this means is that the Tories are likely to increase their majority to somewhere between 40-60 seats, as their increased support at the expense of UKIP has been relatively even geographically.

 

GBPUSD immediately jumped from 1.2500 to nearly 1.2800 upon announcement of the election, it has since risen as high as 1.3000 before settling at a 1.2850 level. This implies markets are clearly more bullish on GBP should Theresa May be returned to Downing Street and have already priced this in. Therefore any moderate Conservative victory is unlikely to have any real impact higher upon GBP pairs, I would expect a small GBP strengthening back to the 1.3000 level which was where things sat two weeks ago, before Labour showed a bounce in the polls. GBPEUR is also likely to increase towards 1.1800, maybe as high as 1.1900-1.2000, but certainly no higher than that.

 

Some commentators are in fact bullish on Conservative weakness in the election, the current counter-argument to a hung-parliament being bearish on GBP is that many believe this might lead to a much softer-Brexit with the possibility of both freedom of movement and free trade continuing. It’s hard to predict whether Brexit or domestic policy changes will be more prevalent in the markets’ actions but I believe domestic policy is more likely to be the leading factor.

 

I would definitely expect to see GBPEUR break below its support level of 1.1285 and potentially head below 1.1000 in the short-term in this scenario. If a hung parliament occurs I also certainly wouldn’t discount the possibility that no party is able to form a government which would trigger a second election creating even more uncertainty in the medium term to all GBP pairs.

 

To summarise, I see a likely moderate Tory majority resulting in a mild strengthening in GBP, meanwhile any result that puts Jeremy Corbyn into Number 10, either directly or as a result of a coalition, is going to mean an immediate and large weakening of GBP across the board. Whilst this could be exacerbated or clawed back, volatility would likely remain high in subsequent weeks as details of the terms of a coalition were revealed, assuming that was his method of victory.

Author : Andrew Stewart

 

 



 

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