With British voters heading to the polls on Thursday for the third time in four years, markets have mostly priced in a majority for Prime Minister Boris Johnson’s Conservative Party.
YouGov’s final poll projected a 28-seat majority, considerably tighter than previous estimates, and indicated that neither a hung parliament nor a more comprehensive Conservative majority can be ruled out.
Britain’s governing Conservatives have seen their lead over the opposition Labour Party cut to five percentage points, according to a Savanta ComRes poll for The Telegraph newspaper published on the eve of an election.
Prime Minister Boris Johnson’s party stands unchanged at 41%, according to the survey, whilst Labour was up 3 percentage points to 36%, the smallest lead recorded by the pollster since mid-October and the best showing for Labour since January.
Sterling slid on Wednesday morning as some caution returned to a currency market which had largely priced in a clear Conservative victory. Speculative sterling shorts, in which investors bet on the pound depreciating, have reduced considerably since mid-September.
The initial price action is likely to take place around the 10:00 p.m. GMT (5:00 P.M. ET) exit poll on Thursday, at which point all previous polling becomes irrelevant. A clear blue majority sends the pound up, while anything else likely exerts downward pressure.
A host of marginal seats are due to be called after 00:30 a.m. GMT, and tactical voting along Brexit lines in key marginals could add to uncertainty. Further price action is possible as the results of these seats are announced.
Analyst expectations for sterling gains differ based on the size of the Conservative majority.
ING chief EMEA FX strategist Petr Krpata projects that a large majority of 30 or more seats would push GBP to $1.35 in the immediate aftermath and take EUR/GBP down to £0.82, while a thin majority would mean fractionally more contained advances to $1.33 and £0.83.
Gallo anticipates that only 335 or more Conservative seats, giving a strong majority, will drive sterling north. This is based on a benchmark of 639 voting seats in the commons rather than the official 650, assuming that Sinn Fein, whose MPs ceremonially refuse to take their seats in the House of Commons, win 7 seats while 4 seats are allocated to speakers.
“However, selling the GBP would be the correct response in the event of 322, because a technical majority of one for CON would not yield a government that has much longevity at all. In fact, the UK could find itself in early elections again by the spring if 322 is the final result,” Gallo said.
Hung Parliament
If no party wins an outright majority, there will be what is known as a hung Parliament.
If this happens, the prime minister in power before the general election will stay in office and be given the first chance to form a government.
A hung parliament would send EUR/GBP towards £0.87 and GBP/USD down towards $1.26 over the next few days as sterling speculative shorts are rebuilt.
Labour-led government
The unlikely outcome of a fragile Labour-led minority government would cause the biggest downside shock to GBP, Krpata predicted.
If the exit poll shows a surprising amount of red, sterling could be driven down to $1.24 and the euro up to £0.89.
“While the prospects of a second referendum could eventually help to stabilize GBP (as well as lower the probability that Labour policies would be introduced in full under a minority Labour-led government) the initial reaction would likely be GBP negative,” he added.
Reference: CNBC, BBC
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