Pound Sterling Above 1.18 vs. Euro: "Pent up Demand has been Unleashed"

Modified: Thursday, 05 December 2019 08:34 GMT

Above: Jens Stoltenberg, Secretary General of NATO and Prime Minister Boris Johnson at this week's NATO summit. Image © Number 10 Downing Street, accessed Flickr, reproduced under Creative Commons licensing.

- GBP/EUR @ 1.1856 on Thursday

- GBP/USD @ 1.3140

- Sterling rallies to fresh two-year highs

- ComRes poll confirms Conservative maintain lead

The British Pound has pushed above the key 1.18 level against the Euro and 1.31 against the U.S. Dollar over the course of the past 24 hours, amidst a rise in expectations for Prime Minister Boris Johnson's Conservative Party to win a majority at the polls next week.

The Pound-to-Euro exchange rate rose 0.87% on Wednesday - a new two-year high - after the implied odds of a Conservative majority reached 70% on the Betfair Exchange, up from a 65% probability on Monday. The Pound appears to be tracking the odds of the election outcome given by the UK's bookmakers, for now at least. "UK bookmakers quote odds of 5/2 on, up from 9/4 on yesterday and suggesting a significantly higher probability than our analysis. Sterling is on the side of the bookies," says Kit Juckes, a foreign exchange strategist with Société Générale in London.

Gains for the Pound continue on Thursday, with the GBP/EUR pair a further 0.25% higher at 1.1856 at the time of writing. The Pound-to-Dollar exchange rate rose to its highest level since May 03. on Thursday morning, with the pair taking in 1.3143 at the time of writing.

"Opinion polls suggests that the Conservative party is on track to win a majority at the 12 December UK general election and this has underpinned GBP recently," says Kim Mundy, a foreign exchange strategist with CBA. "The past 24 hours have seen the first significant price action for sterling since at least October, with GBP/USD rising above the important psychological threshold of $1.30 and the Pound reaching its strongest level against the Euro since 2017," says Ranko Berich, Head of Market Analysis at Monex Europe.

The latest 'poll of polls' from Britainelects, the Financial Times and the BBC show the Conservative Party maintaining a 10 points lead against Labour, anything above a 7 point lead is suggestive of a Conservative majority.

Overnight, a new poll from ComRes cemented the view that the Conservatives are on track to record a majority showing the Conservatives polling on 42% against Labour's 32%. Seat projections based on a margin of 10 points show the Conservatives winning a comfortable majority.

This is the first time ComRes has shown survey respondents their own ballot paper and asked them to give a preference based on all the candidates standing in their particular constituency.

Image courtesy of Comres.

If the parties were to achieve these vote shares at a General Election, it would result in Conservatives having a majority of 48 (Con: 349, Lab: 232, LD: 15, SNP: 31, Brex: 0, PC: 4, Grn: 1) according to Electoral Calculus. The findings show the Conservatives are holding onto more of their 2017 voters than the Labour party (84% versus 68%).

The ComRes poll follows the release of a YouGov poll on Tuesday that showed a 9 point lead. Crucially, both polls showed that Labour's recent recovery in polling has stalled.

In 2017 Labour's vote share steadily rose throughout the campaign, ensuring the Conservatives won with just a 2 point margin. If one week out from the polls the Labour Party are unable to close the gap, the Conservatives will feel a great deal more confident they have done enough.

Whatever the case, the foreign exchange markets appear to be of the opinion the Conservatives will clinch the vote: Sterling was the best-performing major currency in mid-week trade, rising by over half a percent against nine of the world's largest currencies.

"The dam has burst and a considerable amount of pent-up demand has been unleashed – the market seems to be betting that the Tories have an unassailable lead. Against the Euro, Sterling was at a 2-yr high," says Neil Wilson, Chief Market Analyst with Markets.com.

Above: Momentum is to the upside for GBP/EUR

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Where Does Sterling Go from Here?

Polls are expected to be the main driver for the Pound in the run up to next Thursday, when the country goes to the polls.

Any last-minute improvement in support for the Labour Party would likely see Sterling give back some of its recent gains. The rule-of-thumb deployed by pollsters is that a hung parliament results when the leading party achieves a lead of seven points or less.

Right now the polls are pointing towards a 10 point lead, so it would only require Labour to increase support by 3% to trigger market nerves.

"Caution should be taken in reading too much in to the past 24 hours and Sterling’s rally. At first approximation it’s probably safe to assume that a free-spending Conservative government that passes Boris Johnson’s deal will be a net positive for Sterling. But the size and timing of any Sterling rally is highly uncertain – past election day rallies or routs for Sterling have often been reversed in subsequent days and weeks. GBP/USD has traded through its election day value within 30 days of the event, illustrating that any knee-jerk reaction seen on the day may prove short lived," says Monex Europe's Berich.

Image courtesy of Monex Europe.

Johnson does however appear to be conscious that the Conservative's lead in the polls remains shaky, and that a hung parliament is within the margin of error for some polls.

Johnson will today outline plans to cut taxes if he were to win the election, "as he tries to galvanise his party amid evidence that its lead is narrowing a week before voters go to the polls," says Steven Swinford, Deputy Political Editor at The Times.

Isaac Levido, who is running the Conservatives’ election campaign, has told staff that the final seven days of the election is like a "closing statement" in a trial and that the party must hammer home its message, reports Swinford.

"This is now quickly becoming Boris Johnson’s election to loose as a great deal of Brexit optimism is now priced in because of it," says Erik Bregar - Director and Head of FX Strategy at Exchange Bank of Canada.

Kit Juckes at Société Générale says "chasing Sterling here makes little sense, even though short-covering can keep this going for a bit."

Soc Gen's Chief UK Economist Brian Hilliard has said that a hung parliament is still easily possible, and he attributes a 55% probability to a Conservative effective majority which is significantly lower than the bookmakers are offering. Hilliard says there is a 40% chance the Conservatives win the most seats but fall short of effective majority; allowing Corbyn forms a loose coalition; and there is a 5% chance neither party can form a new government; and the existing Johnson administration limps on.