ING: GBP/EUR Exchange Rate Forecast on Potential Corbyn Win
- Pound to Euro exchange rate (27-5-17, markets closed): 1 GBP = 1.1446 EUR
- Euro to Pound Sterling exchange rate: 0.8732, day's best: 0.8726, low: 0.8736
The Pound is now a whopping 3.65% lower against the Euro than where it was exactly one month ago.
The latest bout of selling pressures come amidst the churn of the general election campaign that has seen the once-solid support for the ruling Conservatives questioned by a resurgent Labour party.
Whether or not Labour can extend their lead in the polls remains to be seen, and as such we are going to be watching imminent polling figures closely.
Our hunch is that this is as good as it gets for Labour as the public's attention swings back to the main issue at hand for the UK - Brexit.
Nevertheless, GBP/EUR is under pressure and the recent outperformance of the Euro right across the board could be enough to keep the exchange rate moving lower.
But those watching this market will be understandably interested in predictions as to how far the Pound could go were the Labour party to maintain their improving form.
We can report that analysts at ING Bank in London have sought to answer this question having released a cheat-sheet on the Pound's possible reactions to the various outcomes to the election.
Of course calling an exchange rate level in an uncertain political environment leaves forecasters aiming at a moving target but the important points to pick up are the directionality and the relative size of the expected move.
GBP’s Achille’s Heel
The all-out best-case scenario for the Pound is stability, and this means the incumbents staying in place.
But, the Pound wants more, and this would be in the form of a landslide Conservative win as it will grant Theresa May a strong hand when negotiating Brexit.
We know Corbyn wants to raise corporation tax to 26%; how attractive this makes the UK to foreign investment is important as the Pound currently relies heavily on the inflow of foreign investor capital to balance its books.
If UK investments are to see profitablility slashed on the back of this hike in taxes it is likely this supportive inflow might dry up forcing the Pound notably, and sustainably lower.
The Institute for Fiscal Studies have reported on Friday, May 26 that Labour's plans for paying for its proposed expansion in state activity would not work.
"For Labour, we can have pretty much everything - free higher education, free childcare, more spending on pay, health, infrastructure. And the pretence is that can all be funded by faceless corporations and 'the rich'," says IFS deputy director Carl Emmerson.
And then of course there is Brexit, something that has already given investors a reason to second-guess investing in Britain.
The only offsetting of the Corbyn story would be his desire to stay in the EU single market which offers businesses some certainty and is positive for Sterling.
“While one could see a softer Brexit being the goal of a working Labour government, political uncertainty - GBP’s Achille’s Heel in recent times - is likely to prevail in the short-run,” says analyst Viraj Patel at ING.
Patel is forecasting the Pound to Euro exchange rate to fall down to 1.1235 on the event of a Corbyn-lead coalition government.
Where Sterling goes from the initial news of a win is unknown but the Government’s plans on taxation and spending will be key.
An interesting development meanwhile comes on Friday May 26 as Diane Abbott, Labour's Shadow Home Secretary, has told Bloomberg that a Labour government would work with the Bank of England to stabilise the Pound.
The details of how this would be achieved were however not placed on the table.
Labour government would work with Bank of England to make pound stable, Diane Abbott says https://t.co/skNTDbcThY pic.twitter.com/59nYwMof7x
— Bloomberg Brexit (@Brexit) May 26, 2017
Concerning the technical outlook, the recent moves suggest the Euro’s bull-trend remains in place and therefore it will likely pressure Sterling further.
We did reflect yesterday that perhaps the trend was fading, but the latest fundamental developments on the political front invalidate this view.
“The current bull trend continues,” says Robin Wilkin at Lloyds Bank.
The analyst is therefore watching the GBP/EUR push through another intra-range barrier around 1.1494.
Wilkin is looking for a move closer to the 1.1363-1.1235 range lows.
Can Corbyn Actually Win?
When Theresa May called a snap election in April the consensus was that it was a forgone conclusion - this was merely a chance for May to beef up her majority.
It could be a decision that she will later regret as she now faces the prospect of being one of the country's shortest-serving Prime Ministers.
With campaigning for the election underway once more YouGov report the Conservative's lead is now down to just 5%, a swing that would see May's majority fall to just two.
This will make for a shaky Government and we would imagine that such an outcome would require yet another election to deliver something more decisive.
Another point or two in this direction and Corbyn has the chance of leading his own coalition; this would truly be a game-changed for the country.
"It did not rain but pour for Theresa May this morning as the last YouGov poll showed that their lead over Labour narrowed following the Manchester attacks: Conservative 43%, Labour 38%. As a result the pound shrank back against both the USD and the EUR. The worrying thing for Mrs May and all those hoping for a large Conservative majority to help smooth the Brexit process is that the momentum is very much with Labour who are now enjoying their highest level of support since October 2014!" remarks Jonathan Pryor, Head of FX Dealing at Investec in London.
Watch Next Tranche of Polling Results
Some caution might be warranted at this stage as there is the possibility that we are looking at floor for falling Conservative support, something that YouGov suggested in their now infamous poll.
And we do have historical precedent to rely on.
"Such a polling bounce for Labour was also eminently predictable (a similar occurrence took place for the Conservatives in the 1997 election, and we know how that turned out), so we should see some cable buying as the session goes on," points out Chris Beauchamp, Chief Market Analyst at IG.
Is this the blip needed to energise and focus Conservative voters and the party itself?
We will continue to watch the polls, note that the weekend will have a slew of findings coming out for the Sunday papers.
If the Conservatives can show this is a blip we would expect Sterling to stabilise - not necessarily recover fully - when trading commences on the following week.
“It is clear that the election is the most powerful driver behind the UK’s currency. The next two weeks could see more volatility for sterling as polling figures in the run up to the election become more frequent. Analysts will be looking for any definitive signs that the Conservatives can win the election before the pound can consistently return to the levels seen recently,” says Paresh Davdra, CEO of RationalFX.
It's Good News for the FTSE 100
A side-effect of the weaker Pound is a higher FTSE 100 which tends to benefit as investors see higher buying power as the weaker Pound discounts the value of stocks.
The FTSE 100 rose to a new record high on Friday, May 26 as a result of the trevails of the local currency.
