Forecasts for British Pound v Euro + Dollar on Hung Parliament

Viraj Patel exchange rates

  • Quotes:
  • Pound to Euro exchange rate: 1.1388, down 1.42%
  • Pound to Dollar exchange rate: 1.2765, down 1.48%

Pound Sterling has taken a knock on signs that the UK could be heading for a period of ineffectual governance.

At the time of writing the Conservatives are forecast to win between 315 and 321 seats, short of the 326 required to form a majority.

With Brexit negotiations due to start next week, the fact that the UK is more divided than ever will concern businesses and investors.

The implications of this uncertainty on the Pound are understandably poor.

Viraj Patel, analyst with ING Bank N.V says a hung parliament would result in chaos for Sterling:

"There is no doubt that a hung parliament is the worst case. We noted that maximum chaos would be if the Conservatives are only able to get somewhere between 290 to 325 seats; it’s the grey area where it’s not enough for a Conservative majority, but also potentially not enough to see a stable Labour-led coalition being formed quickly."

Where does he see the Pound going then?

Patel says:

"The margin of error on exit polls is typically low (LHS chart below) and at best it shows that Tories might just be able to get an overall majority. But even a slim Tory majority is unlikely to be convincing enough to suggest that Theresa May’s election gamble has paid off. Potential pressure for the Prime Minister to resign would only add to political uncertainty and further add to the pound’s woes.

"The best playbook for the pound under a hung parliament is the 2010 election; as the graphic below shows, GBP/USD continued to fall in the days after the election as major parties scrambled around to form a coalition. Under a similar environment, we wouldn’t rule out GBP/USD falling to as low as 1.24 and EUR/GBP moving up towards 0.90."

EUR/GBP exchange rate at 0.90 means a fall to 1.11 in GBP/EUR.

Pound forecast election

Standard Chartered have come out with their expectations:

"Investors could be tempted to buy the British pound (GBP) on the back of the exit poll on the assumption that a smaller Conservative majority or Conservative-led coalition could deliver a ‘softer’ Brexit. While a more conciliatory approach in negotiations with the EU might be expected, until the results are more clearly known, political uncertainty will drive further GBP-USD downside, in our view.

"A move towards 1.24 is our central case over the next 12 hours on a ‘hung’ parliament where the Conservatives emerge as the biggest party. Election night in 2010 provides a useful example. As it became clear that the Conservatives were in the lead but falling short of forming a majority government, GBP-USD fell from around 1.50 to 1.44 as the results came through."

Analyst Kit Juckes at Societe Generale 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.

 

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