British Pound: Renewed Talk of General Election adds Fresh Downside Pressures vs. Euro and Dollar

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- GBP/USD at 1.2406, GBP/EUR at 1.1059

- Team Johnson acknowledge strategic imperative of early General Election

- General Election adds to uncertainty weighing on Sterling

- Pound triggers fresh two-year low vs. Dollar

Pound Sterling remains under pressure in mid-week trade with foreign exchange markets digesting the latest political headlines that suggest a General Election is being considered by Boris Johnson.

Johnson remains favourite to replace Prime Minister Theresa May new Tuesday when the result of the Conservative Party leadership vote will be made known, and senior allies of Johnson told the Times newspaper that he wants to hold an early general election “while Jeremy Corbyn is still around”, and that plans are being considered to overhaul the Conservative Party’s campaign machine.

The Times reports Sir Edward Lister, who would oversee Johnson’s first 100 days in office, is planning to ramp up recruitment and pump more money into Conservative headquarters to ensure that the party is on an “election footing”.

Sterling is a political currency at present, therefore the uncertainty that a General Election promises will likely only add to existing downside pressures.

"The market appears to be obsessed with the likelihood of renewed political chaos in the UK, with investors continuing to spurn the British Pound," says Marc-André Fongern, Head of FX Research at MAF Global Forex.

The Pound-to-Euro exchange rate fell to a fresh seven-month low at 1.1047 over the past 24 hours amidst growing 'no deal' Brexit expectations, meanwhile the Pound-to-Dollar exchange rate has this morning triggered another two-year low having tested 1.2383.

"Dark times for the Pound with GBP/USD posting at 1.23 handle for the first time since April 2017. Bitter pill to swallow - but the next Prime Minister has to view this as a sign of lack of faith in UK politics and governance by international investors. And they must address this," says Viraj Patel, a foreign exchange strategist with Arkera.

An early General Election is one of a duo of political risk factors weighing on Sterling, the other - and most significant - is of course a 'no deal' Brexit.

Johnson has steadfastly ruled out triggering an early General Election, but the maths in Parliament are firmly pitted against him with the Conservatives expected to hold a majority of just three once the by-election in Brecon and Radnorshire has concluded next month.

Talk of Conservative MPs voting against their own government should a no-confidence vote be called to prevent a 'no deal' Brexit mean the new Prime Minister might have little choice but to face the electorate.

Senior Conservative MP Dominic Grieve has said former cabinet ministers could be among those who feel they have no choice but to vote down a Boris Johnson administration in order to prevent a 'no deal' Brexit.

Grieve believes a 'no deal' Brexit is becoming increasingly likely as both Johnson and his leadership rival Jeremy Hunt both appeared to reject the Northern Ireland backstop as being something they would accept in any future deal with the EU.

Signals have meanwhile emerged that the EU would seek to sweeten the backstop in order to potentially help the deal they reached with Prime Minister Theresa May to cross the line in Parliament.

But, Johnson and Hunt have indicated the entire backstop mechanism must be jettisoned, thereby adopting a stance that suggests a compromise on the matter is highly unlikely.

“Blocking 'no deal' technically may be quite difficult but as I’ve said on many occasions in the last 12 months, if the government persists in trying to carry out a no-deal Brexit I think that administration is going to fall,” said Grieve.

Above: Sterling has lost significant ground against all major currencies over the course of the past week. (Past 5 trading days).

"The near term outlook for GBP is dismal; our cable call for end Q3 remains 1.20 due to the all but inevitable Boris 'no deal' scare. But assuming no deal and an ensuing recession are ultimately avoided, UK macro fundamentals still point to solid upside for sterling in 2020," says Ranko Berich, Head of Market Analysis at Monex Europe.

Betfair are today offering a 44% implied probability that the date of the next General Election is in 2019, while Ladbrokes are seeing a 47% probability.

While a Johnson Government might lose a confidence vote, there also appears to be the sense that there is a strategic advantage of pursuing an election sooner, rather than later.

One senior member of Johnson’s team told The Times: “There’s a desire to get this done while Corbyn is still around. Labour is utterly divided — Brexit is killing them. Labour is in no fit state to fight a general election.”

Polling suggests there is a four-way split amongst the parties with the Conservatives, Labour, Liberal Democrats and Brexit Party all polling in the early 20%'s.

Should polling suggest the Conservatives are benefiting from a tougher line on Brexit, at the expense of the Brexit Party, an incoming PM might be tempted to 'go to the country' and we would expect odds for an early General Election to rise.

The Pound tends to experiences heightened volatility, and trend lower, in the lead up to General Elections as markets anticipate the potential for regime change.

In short, elections present uncertainty, and the Pound dislikes uncertainty.

"If an election is called, current polling suggests a near 50/50 split of a right or left-of- centre government being formed. Statistically, the fate of the UK politics and Brexit is currently a coin toss; GBP is unlikely to take that uncertainty well and should head lower, in our view," says Jordan Rochester, a strategist with Nomura.

We would therefore expect increasing odds of an election in coming months to put pressure on Sterling.

For now those odds are below 50% but should they rise over coming days and weeks we would expect the issue to increasingly weigh on the currency.

"What we expect and can imagine that the new leader of the Conservative party is hoping for is a return of voters from the Brexit party back to the Conservatives thanks to their pledge to achieve Brexit by 31 October “Do or die.” This would increase the risk of a snap election to regain a majority in the House of Commons that was lost in the 2017 election," says Rochester.

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