The Pound is a Lose-Lose on General Election say ING, Warn of Potential Downside vs. Dollar and Euro

Image © Gage Skidmore

- Despite ‘no-deal’ off the table Pound vulnerable

- Early election could see a Conservative-Brexit Party win

- Even if Labour win, their socialist policies negative

The British Pound is at risk of further declines despite the House of Common’s voting on Tuesday to take a Sterling-toxic ‘no-deal’ Brexit scenario off the table, says Dutch lender ING Bank.

ING’s bearish forecast is based on the expectation that Prime Minister Boris Johnson will ultimately get his snap General Election in the middle of October, something he has sought in the hope of winning back a parliamentary majority.

Such an outcome would bestow on him the power to drive forward his vision of Brexit without interference from 'remainer' MPs.

“While Sterling has been rebounding after the UK Parliament’s first successful step towards legislating against a no-deal Brexit yesterday, we note that the (likely) resulting early elections (the motion for this is likely to be submitted today) bode ill for the pound – bar a possible short term reprieve,” says Petr Krpata, chief EMEA and IR strategist at ING in London.

The Pound-to-Euro exchange rate is trading at 1.1083 at the time of writing after recovering from lows of 1.0930 yesterday, following gains after the UK parliament won a decisive no-deal-blocking vote against the government on Tuesday evening.

The Pound-to-Dollar exchange rate has recovered back above 1.21 to quote at 1.2185 after recording a low of 1.1959 on Tuesday.

Following events in parliament, the government now has no majority after losing their majority of 1 yesterday. This happened just before the vote on blocking ‘no-deal’ when conservative MP Philip Lee defected to the liberal democrats. The majority was then further cut after 21 conservative rebels were sacked for voting against the government.

A General Election actually breeds a whole set of new risks for the Pound, says Krpata.

Firstly, Johnson is likely to run on a hard-line Brexit ticket, which will reawaken the spectre of a ‘no-deal’ possibility if he wins as he can then simply repeal whatever law has been introduced barring a ‘no-deal’.

Image (C) Poll of Polls

The conservatives lead labour in the polls by 8% according to average poll results, and whilst they may not have enough of a majority to win a clear outright majority (they only have 33% of the vote), they might achieve a majority with the help of the Brexit party.

Together these party’s command roughly 46% of the vote according to recent polls, which in the UK voting system would almost certainly be enough to give a Conservative-Brexit Party coalition a strong majority.

Such a coalition would obviously be in favour of the most extreme forms of Brexit which would be negative for the Pound.

Secondly, even if Labour were to somehow to win the election, the Pound would probably still fall because of their far-left economic policies which are seen as anti-business.

A Labour government would confiscate about £300bn of shares in 7,000 large companies and hand them to workers in one of the biggest state raids on the private sector to take place in a western democracy, according to analysis by the Financial Times and Clifford Chance.

An early election is by no means certain, however, since Boris Johnson would need to win a majority of two-thirds of MPs in a vote to hold an early general election. Given he does not even have a simple majority this seems unlikely.

What seems more probable is that Jeremy Corbyn will control when an election is held via a vote of no-confidence in the government.

Corbyn has said he will not call such a vote until the ‘no-deal’ bill has gone into law, in order to remove the risk of such an outcome, because it is the prime minister who decides the date of an election, and the opposition says there is a risk he might call for an election after the Brexit deadline, resulting in a default ‘no-deal’ Brexit anyway.

Another very unusual possibility is that Boris Johnson might be able to get an early election via a vote of no-confidence called by his own MPs in his government, in which they purposely voted against their own PM, so as to enable him to decide the date of the next general election.

Another reason ING is bearish the Pound is because they do not think the Pound is properly reflecting the risks on the horizon. Their risk premium model suggests the Pound has more scope for loses to adequately reflect risks of ‘no-deal’ and other negative outcomes.

“As per Sterling risk premium tracker, we see the risk of no-deal Brexit / early election as underpriced by the market and look for more downside to GBP, with more risk premium to be built into the pound,” says Krpata.

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