GBP/EUR Rate @ 1.11 on Hung Parliament says Soc Gen's Juckes

Above: Kit Juckes of Société Générale says if Theresa May's gamble to seek a larger Parliamentary majority fails it could result in the Pound slipping lower.

The British Pound is at risk of plumbing levels last seen in October 2016 against the Euro if Theresa May fails to win a majority on Thursday says a noted foreign exchange analyst.

Kit Juckes of Societe Generale says the currency will react negatively to the uncertainty posed by an hung parliament.

In a briefing to clients Juckes, like many others out there watching the foreign exchange markets, is not reading too much into the polls at present.

Weekend polls put the Conservatives ahead by between 1% and 9%, “which doesn't tell me much,” says Juckes.

The Pound has fallen over recent weeks as the Conservative’s advantage over Labour in the polls has narrowed markedly.

When May called the vote back in April she was regularly seen polling with a 20 point advantage over Labour and markets bought Sterling in large quantitates as they welcomed the prospect of a stable domestic Government that could afford to implement a beneficial Brexit implementation period once negotiations with Europe are complete.

The polls are unclear on the exact scale of of the Conservative's advantage - taken at face value they would suggest the Conservative's will more or less maintain their current position in parliament.

“That's a pretty gloomy prospect but not one that would have a major impact on the FX market, given that it is expected,” says Juckes. “The next major move would depend on the economy, where we are gloomy).”

The analyst says A bigger majority is probably GBP-friendly, while a hung parliament, with no overall majority, just increases uncertainty.

Juckes says this would be the one outcome that could get EUR/GBP to 0.90 in the short term.

EUR/GBP at 0.90 equates to GBP/EUR at 1.11.

“The possibility of a labour-led coalition that could trigger a much softer Brexit with access to the Single Market, (or even another vote) isn't really being considered yet. GBP might eventually benefit from a Labour win, but only after a period of even greater uncertainty weakened it further,” says Juckes.

This view is shared by analysts at Deutsche Bank who believe a ‘rainbow coalition’ between Labour and other leftist parties would benefit Sterling.

Looking Ahead: The Polls to Watch

Keep an eye on the polls, why? Because they clearly matter:

As we can see, it is possible to attribute recent moves in the Euro vs Pound Sterling exchange rate to the shift in fortunes faced by the Conservative party.

For now markets appear to be confident May can expand her majority.

A day before the election Bloomberg report that, privately, Labour Party officials and candidates are preparing to lose dozens of seats.

A party aide speaking on condition of anonymity said officials had informally generated a list of more than 30 districts they have no prospect of holding.

Three candidates, all fighting to hold seats, said their experience canvassing for votes bore little relation to the polling, with districts where Labour had majorities in the thousands at risk.

The figures being talked about here tally more or less with the 72 seat majority currently being projected by Electoral Calculus.

Upcoming Polls

Wednesday:

IPSOS Mori, 11:00 AM
Panelbase, afternoon
Comres, evening
ICM/Guardian, late afternoon, early evening

Anytime:

YouGov

With little of note on the domestic data calendar, PM Theresa May’s appearance on ITV’s "Tonight" show at 19:30 (BST) is likely to be the most important event today.

Thursday’s election approaches with the polls showing wide variations in the Conservative lead, in the backdrop of a tightening race.

Yet, bookmakers are still indicating that the Conservatives are heavy favourites not just to win (90%) but also secure a majority (76%) - the most likely result in terms of an estimated majority is a gain to between 50 and 75 seats.

(All probabilities are based on Betfair exchange odds as of 08:00 (BST)).

The Election and Other Sectors

The Pound is understandably likely to be the conduit of sentiment in the upcoming vote, but what about other markets?

John Wyn-Evans, Head of Investment Strategy at Investec Wealth & Investment looks at other sectors that could potentially be impacted:

Large capitalisation equities will continue to follow global trends owing to their heavy overseas earnings exposure, with a weaker pound providing something of a boost.

Mid and small-cap equities with more domestic exposure would fare less well under a weaker pound, reversing some of the recovery they have made as the pound rallied and the economy surpassed most expectations.

Gilts also tend to follow global trends, but, as we saw last summer, can benefit from their safe haven status in uncertain times.

However, we suspect that they would not react so well to “tax and spend” Labour plans, even though Labour offers a “softer” Brexit. Also, with a yield of just over 1%, the conventional UK 10-year gilt continues to offer little return.

We have a marginal preference for Index-Linked Gilts which offer protection against inflation caused by a weak pound.

Putting all this together, we find it difficult to make a case for specific evasive action ahead of Thursday, especially as the betting markets still find a decent Conservative majority to be the most probable result. If not, our existing exposure to non-UK assets will provide a decent cushion.