Pound Sterling at Risk of "Buy the Rumour, sell the Fact” Trade on Conservative Win

• Quick Quotes:
• Pound to Euro conversion rate: 1 GBP = 1.1539 EUR, day's best rate: 1.1541, low: 1.1498
• Pound to Dollar conversion rate: 1 GBP = 1.2934 USD, day's best rate: 1.2978, low: 1.2949

Votes are being cast in the snap General Election of 2017 and for financial markets the outcome could well spark volatility for the British Pound.

We saw an extreme example of this when the UK voted to leave the European Union almost one year ago.

This current generation of traders won’t forget in a hurry just how a political upset can impact foreign exchange markets and is why it will be all hands on deck at the major brokers and banks when election results start coming in.

"There is little to do now but wait," says Shaun Osborne, an analyst with Scotiabank. "Voting is underway and will continue through to 22.00 UK time – 17.00 ET at which point the first exit polls will be released. This should provide some fairly strong indications about how the election has gone for the main parties."

The big surprise would be a Labour win, in whatever shape. Such an outcome is widely seen by the analyst community as being negative for Pound Sterling, particularly in the short-term, owing to the uncertainties such an outcome pose for the UK.

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

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.

Sell the Fact

The other side of the coin is of course a Conservative win, widely seen as positive for the UK currency.

“If the base-case of a majority Government for the Conservatives plays out, on the one hand this is what the market is pricing so the relief of this outcome could be viewed as Sterling-supportive,” says a briefing released by LMAX Exchange ahead of the vote.

But - here is lies an issue those watching GBP must be aware of. Pound Sterling has been rallying over recent days against the likes of the Dollar and Euro on market confidence that the Conservatives will take about 60 or so seats.

If this target is hit then there could well be a sell-off in the Pound; a classic “buy the rumour, sell the fact” type scenario that financial markets are so fond of.

“There is risk for a sell the fact reaction and also risk that as the market once again considers that this Government will push for a hard-Brexit, this could also unnerve Sterling longs and spark some profit-taking,” say LMAX Exchange.

Credit Suisse have told their clients that if the Conservatives win with a comfortable majority of 50 seats or more, there is scope for GBP to pop higher on the result.

But, they expect a reversal to ultimately shape up.

“We would look to sell GBP on such a pop, given our longer-term concerns over Brexit talks and the future for the UK economy,” says Shahab Jalinoos at Credit Suisse.

Keep in mind too that Thursday sees ex-FBI Director James Comes testify before US lawmakers. There could be an explosive outcome for Trump and his team which could materially impact the Dollar.

Size of the Conservative Majority Matters for Sterling

As pointed out by a number of analysts, this election differs to previous elections in that not only does the winner matter, but the size of that winner’s majority matters.

Deutsche Bank argue that a big negative for Sterling would be were PM May to secure a majority of less than 50.

She would be likely to retain power, but without the majority needed to conduct Brexit negotiations effectively under such a scenario.

“The influence of hard-Brexit MPs over looming issues such as the divorce bill would be large and the chances of reaching a deal with the EU low,” says Oliver Harvey at Deutsche Bank.

YouGov polls have been particularly negative on May’s chances, with the most recent seeing a wafer-thin 8 seat majority.

“A slim majority of 8 seats, as predicted by YouGov, is likely to arouse fears of a hard Brexit, as the 50 or so Eurosceptic MPs in the Conservative Party could sway the negotiations. This could spook GBP traders,” says analyst Kathleen Brooks at City Index.

The purpose of an early general election would have been negated, and the starting point of talks would be worse given the ramping up of rhetoric with the EU27 during the election campaign.

Significant economic weakness and/or market pressure would once again be required to secure a transitional deal, or the UK would crash out of the EU in March 2019.

If this happens then Brooks would expect GBP/USD to slip back towards the 1.25 level that the exchange rate was trading at before Theresa May called the election on 18th April.

Above: The FT's Roger Blitz and Viraj Patel, forex strategist at ING, discuss the way the pound is likely to move following the UK election.

Consensus Predictions for Sterling-Dollar

A poll of foreign exchange analysts conducted by Bloomberg shows that a hung parliament could see GBP/USD fall to 1.2350.

A large Conservative majority would see a rise to 1.31 while a small Conservative majority would see gains limited to 1.3025.

A Labour win on the other hand would see the exchange rate fall down to 1.2484.

The survey covered ABN Amro, BNY Mellon, CBA, CIBC, Mizuho Bank, MUFG, Nomura, Rabobank, Royal Bank of Canada, Saxo Bank and SEB.

Results Timeline:

1) An exit poll-based seat projection will be published when the polling stations close at 10pm.

These were spot on in 2005 and 2010, but incorrectly predicted the Conservatives would  ail to secure a majority in 2015.

The pollsters who carry out the exit poll acknowledge that the accuracy of the 2005 and 2010 polls was exceptional, and have suggested that a majority prediction within 10-20 seats of the actual outcome is a good result.

2) The first official seat declaration is usually made at around 11pm, with the first bellwether results expected to come in at around 1am from Battersea (which has consistently voted for the largest party since 1987) and Nuneaton (since 1997).

But with these seats less marginal than in the past, if it is close, eyes will be on Bury North which is expected to declare at 2am.

3) The seat has voted for the largest party in every election since 1984, and the sitting Conservative MP has a slim majority

4) A clear picture of the overall result should emerge between 3am and 5am as the bulk of the results are announced.

Pound Chugs Along into Results Night

Sterling favoured the bottom of a narrow overnight range against the dollar with currency players on the sidelines awaiting today’s flurry of action.

The pound could raise the roof of its range if Theresa May can hang on to power and do so with a stronger majority in parliament that gives her more clout to call the shots on Brexit. Any shock outcome could leave the pound vulnerable.

It’s critical for Britain to get its political house in order ahead of June 19, the day Britain and Brussels are expected to start formal Brexit negotiations that could take years to hammer out.