Sterling dropped sharply last night following the release of the latest YouGov poll which shows that the Tory’s lead is receding. The highly regarded MRP poll shows that the Conservative advantage has slipped from 68 to just 28 seats. This is the poll that correctly predicted a hung Parliament in 2017 and indicates that the scenario could repeat itself given that many constituents are hard to call.
This is the most market friendly outcome and could see sterling extend its gains. A high Tory majority would mean reduced uncertainty over Brexit and the transition period. The pound could advance towards 1.35 in the near term.
The pound could advance but gains would be limited. Whilst the Withdrawal Agreement would be passed through Parliament concerns would arise over whether an extension to the transition period would be agreed in 2020. Looking beyond the election result, historically the pound has underperformed in small majority governments.
The prospect of Brexit being done early next year would evaporate and the pound would price in further Brexit uncertainty taking it back to 1.26
4. Labour Small Majority
This is the least market friendly outcome given market concerns over Labour’s nationalisation and fiscal policies, in addition to further Brexit uncertainty. The market is not pricing in a Labour win.
Will we see an impact on other G10 currencies?
If there is any spill over we expect it to be short lived given that Brexit is a domestic event. Post the Brexit referendum, the US dollar and Japanese yen outperformed, whilst the euro came under pressure.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.