Pound to go Below 1.10 v Euro on Hung Parliament say Exchange Rate Analysts

Pound Sterling holds ground north of 1.15 against the Euro as voters head to the polls in the UK General Election.

The Pound to Euro exchange rate enjoyed a strong rally heading into voting day courtesy of the Euro taking a hit following the leak of European Central Bank (ECB) inflation forecasts to the media ahead of their much-anticipated policy meeting.

This move neutralises some of the potential for market-moving volatility on Thursday which should allow traders to focus heavily on the General Election outcome.

Any further recovery in Pound Sterling relies on the Conservatives expanding their majority; something the polls don't guarantee but which betting markets are confident of.

Yesterday the battle appeared to be a two horse race, as Jeremy Corbyn’s odds to be the new Prime Minister were as short as 3/1 according to Oddschecker, contrast that to this morning and he’s already drifted to 11/2.

The Conservative party, on the other hand, appear to have it all wrapped up report Oddschecker; the odds of them winning the most seats is as short as 1/33 with some firms, implying a 97.1% chance of winning.

The shift will come on the back of improved polling for the Conservative Party.

Of six polls published on Wednesday, two showed the Conservatives widening their lead over Labour, two showed a narrowing and two were unchanged.

Notably, YouGov, which has been the least generous to the Conservatives, have shown the ruling party’s lead grow once more.

But they mostly suggested she would increase the small majority she inherited from David Cameron last year, shortly after the surprise referendum decision to take Britain out of the European Union.

Volatility Around the Outcome

The final opinion polls ahead of voting day show the Conservatives to have enough of  a lead to expand their Parliamentary majority.

However, the tightening of the polls cannot be ignored as the party's lead over Labour was a massive 20 points six weeks ago and is now just in double digits.

Survation, who were the closest to calling the 2015 result actually point to the Conservative’s lead now standing at a mere one point in their most recent poll.

The uncertainty of the outcome means the UK and its currency are facing a bumpy ride as the Conservatives might not get a strong mandate which opens the door to hung parliament and coalition Government.

“A weak Conservative majority may see considerable intraday volatility in EUR/GBP and other Sterling pairs,” says James Rossiter at TD Securities. “Much will depend, we think, on the precise path that exit polls and constituency results take.”

Rossiter’s concerns over a hung parliament largely rest with the uncertainty the outcome provides for both domestic and foreign matters.

Recall that the UK and EU are scheduled to soon start negotiating Brexit; a hung parliament could leave the UK without a position and a negotiating team forcing a delay in proceedings.

With only two years to get the deal done, time will therefore be limited.

TD Securities say their first area of focus for the EUR/GBP exchange rate should a hung parliament look likely is a test of the mid-March highs of 0.8787, but the 0.8855 level is also likely to become a strong attractor.

For those looking at this from the other way, these equate to falls in the Pound to Euro exchange rate down to 1.1380 and then 1.1293.

Analyst Kit Juckes at Societe Generale meanwhile tells us that the his expectations for the GBP/EUR on initial signs of a hung parliament would be for a fall to 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 in a note to clients.

What Would Happen to the Pound if the Conservatives Lead the Minority Government?

For TD Securities a minority Government may be the most difficult scenario for investors to navigate.

“The political wrangling to form a government can extend for days—or even weeks—and we think sentiment toward the pound will struggle because of it,” says Rossiter. “This leaves us focused almost exclusively on upside risks for EURGBP.”

In this environment, TD Securities think the 0.8855 level would be the initial target for a move higher, although 0.8885/0.8935 may also come into view.

This translates into GBP/EUR at 1.1293, 1.1255 and 1.192.

Deutsche Bank’s Oliver Harvey says such an outcome is a “strong Sterling negative” as Theresa May’s position would be severely questioned and a Brexit candidate would have a good chance of leading the party and thus becoming Prime Minister.

Of course this opens up the need for yet another election.

More uncertainty means more Sterling weakness.

A Labour-led Minority or Majority

Such an outcome is forecast to immediately produce a similar spike higher in EURGBP.

The same key resistance points would apply and TD Securities say they could even see a further press higher.

Above 0.9025, the 0.9050 and 0.9142 levels would be key areas to watch.

This is a Pound to Euro exchange rate at 1.1080, 1.1050 and 1.0939.

“In this case, however, the risks of a violent reversal may be even more significant. An unexpected Labour majority throws open the door to significant changes to domestic policies,” says Rossiter. “This outcome will also introduce, however, expectations of a more constructive divorce from the EU.”

We have heard from a number of analysts that were a coalition government to see Liberal Democrat and nationalist participants it could result in a soft-Brexit.

This is seen as positive for Sterling longer-term as it is assumed this would help the UK’s trading position.

So this is positive to Sterling from the outset, however, there is no saying what the domestic agenda and impact on the economy would have.

Rossiter say this vote outcome could even keep hopes alive for some that Brexit may not even happen in the first place, even though Labour considers the issue “settled”.

The moves in this scenario are substantial with TD Securities warning that the market could embark on a retracement of as much as 50% of the intraday move, particularly if Labour were to win an outright majority.

“We would keep a close eye on the performance of other UK risk classes, however, for guidance as investors would clearly find themselves against an entirely different political landscape. Again,” says Rossiter.