Pound-Euro Exchange Rate can Bounce to 1.25 on Johnson Win: JCRA

Modified: Wednesday, 04 December 2019 07:43 GMT

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- Pound paralysed ahead of next week's vote

- Pound will rise in 2020 on Conservative majority say JCRA

- Fall sharply on a Labour win

- Fall modestly in hung parliament

The British Pound trades towards the top of its recent ranges against the Euro, U.S. Dollar and other major currencies in mid-week trade, amidst ongoing signs the Conservative Party will secure a majority on December 12.

The odds of a Conservative majority rest at about 66% according to the Betfair Exchange, and the Pound will continue to move higher and lower over coming days as those odds change.

While the Pound does remain supported, it appears unable to break higher and this suggests the currency has not fully factored in a Conservative majority, amidst ongoing nerves a hung parliament will be delivered.

According to Chris Towner, Director at JCRA - a financial risk management firm - "a clear majority for the Conservatives would help strengthen Sterling further and may loosen the economic restraints caused by the Brexit uncertainty."

However, Towner says that a Conservative majority is by no means assured, and this explains why the Pound appears to be locked in its current state of paralysis.

"The last time the UK held a general election in December was in 1923, and it was an experience the Conservative Party would rather not repeat. Having won an election the year before, the Conservatives had a comfortable majority and no obligation to go to the public for another four years. But the prime minister, Stanley Baldwin, wanted a firmer mandate from the people in order to strengthen his position as party leader. Instead, he lost his majority and ushered in the country’s first Labour prime minister, Ramsay MacDonald, in coalition with the Liberals," says Towner.

However, in 2019 the prospects for Labour "look a little grimmer," notes Towner, citing last week's release of the much-anticipated YouGov MRP model that projected the Conservatives would win with a majority of 68 seats.

The results of the poll saw Sterling advance on its rivals, however the currency has not yet been able to break higher and trend into new multi-month highs.

This is because markets are nervous the actual outcome of the vote will be a great deal tighter, indeed polls continue to point to a trend of ongoing increases in support for Labour, while the Conservatives are no longer able to grow their vote share.

This matters because the closing in the gap between the two parties means the Conservative's projected majority is diminishing. Indeed, when the gap reaches 7%, a hung parliament emerges.

And for Sterling, a hung parliament almost certainly means a Labour-led minority government, simply because the Conservatives have no potential allies to be found in the other parties.

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Scenario Forecasts for the Pound

While the Pound is happy to tread water in the lead up to the December 12. vote, we expect a strong and clear trend to emerge once the outcome becomes know. There are three scenarios for those watching Sterling to consider: 1) a Conservative majority, 2) a Labour majority and 3) a hung parliament.

"A win for Labour would certainly give it a fright. The party’s most left-wing manifesto in decades promises nationalisation programmes, significant rises in corporation and capital gains taxes, rent caps for private landlords, and the dilution of large companies’ share capital," says Towner.

Under such an outcome, JCRA forecast the Pound-to-Euro exchange rate to drop back below 1.10, and the Pound-to-Dollar exchange rate back towards 1.20.

However, JCRA say further downside risks would be limited by the prospect of a softer Brexit, "Labour has ruled out leaving the EU without a deal, saying they would negotiate a closer relationship with the bloc. They then promise to put the final exit deal to a referendum, with remain as an option."

As mentioned, if the Conservatives win a majority - the current odds-on outcome - the Pound would be expected to rally.

"With a promised fiscal stimulus of £20bn alongside business-friendly policies (at least by comparison with the Labour manifesto), sterling would be expected to edge back towards 1.40 against the U.S. Dollar and 1.2500 against the Euro," says Towner.

Towner says the passing of a deal would immediately shift market attention to the trade deal negotiations with the EU, which are ambitiously timetabled to be concluded by the end of 2020.

A hung parliament would be expected to result in further frustration at the continued stalemate in passing a Withdrawal Agreement.

According to JCRA, Sterling would be likely to fall in this scenario by a few percent with GBP/USD towards 1.2500 and GBP/EUR towards 1.13-1.14.

"Looking at the bigger picture, the Pound remains undervalued by historical standards, but for understandable reasons. If the fog can lift over Brexit and trade negotiations with the EU start to gain momentum, then our summer holidays next year should be a little less expensive," says Towner.

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