Pound Sterling Would "Go Through the Roof" vs. Dollar and Euro on Conservative Majority: UBP’s Kinsella

Pound would be boosted by Conservative win

Above: Prime Minister Boris Johnson visits Addenbrookes Hospital. Image © Number 10 Downing Street

- Pound-to-Euro exchange rate @ 1.1593

- Pound-to-Dollar exchange rate @ 1.2809

- Sterling tipped to rise if Conservatives win

- The opposite to happen on Labour/coalition victory

- Odds of Conservative majority as low as 40%

If the result of the next general election is a Conservative majority, the British Pound will rise substantially says Peter Kinsella, global head of FX strategy at Union Bancaire Privée, the Swiss private bank with CHF 134.4 billion of assets under management.

The pair, which is currently trading at 1.2865, “would go through the roof” if Boris Johnson’s party won an outright majority in Parliament, on December 12 says Kinsella, noting the outcome would enable the Conservative government to get their Brexit deal approved by parliament with no hitches, bringing to end years of uncertainty and delay.

“It means you get a Brexit deal and political certainty, and it also means the tail risk of a Jeremy Corbyn government isn’t going to happen. So it is a very positive scenario for Sterling,” says Kinsella.

The Pound has already risen from 1.23 to 1.30 against the Dollar and from 1.08 to 1.16 against the Euro as the risk of a ‘no-deal’ Brexit steadily faded from early August onwards. However, much of that boost also owes itself to the reaching of a Brexit deal between the EU and UK, which immediately signalled to markets the Conservatives would run on a campaign of delivering a Brexit deal, thereby sharply reducing 'no deal' odds even further.

“Elections - usually - are seen as a drag on a nation's currency given a period of uncertainty. Yet with this election, the purpose is to remove the uncertainty. With parliament officially dissolved and the campaign period starting, my view is that any majority in December is probably a positive for the pound. With Labour campaigning for a second referendum and the Lib Dems on Revoking Article 50, it could be argued that Boris' deal is the perceived worst-case outcome," says John Goldie, FX Dealer at Argentex Group plc.

Kinsella says that the election result is by no means 'priced into' Sterling exchange rates and he forecasts the GBP/USD could reach as high as 1.35, maybe even 1.40 on a Conservative majority.

This would provide upside momentum right across the Pound exchange rate complex and we would expect pairs such as GBP/EUR and GBP/AUD to press higher under in sympathy with GBP/USD.

The Conservatives are in the lead by about 10% according to most polls, and whilst a Conservative win would result in further upside, a Labour victory or Labour-led coalition win would result in a weaker Pound says Kinsella.

Poll of polls

Above: Poll of Polls chart from POLITICO

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But Odds of a Conservative Majority Slipping

While the polls suggest a Conservative majority via about a ten point lead, we note that betting markets are seeing the odds of a Conservative majority as being at less than 'evens'.

We have been tracking the odds exchange BetFair over recent days and have seen the implied probabilitiy of a Conservative majority slip below 50% since the start of the campaign, and we would suggest this is all down to the first-past-the-post electoral system in the UK where vote share does not translate into seats. The Conservatives are likely to see their chances of passing 'the post' curtailed by the Brexit Party which will split the leave vote right across the country.

As of Friday, the implied probability of a Conservative majority is at 45%.

Mutjaba Rahman, Managing Director, Europe, at the Eurasia Group - an independent research consultancy - says they see the probability of a Conservative majority at 40%, and a Labour minority government at 30%, a Conservative minority government at 20% and deadlock at 10%.

"These are scarily muddle-through odds when it comes to UK political outcomes," says Viraj Patel, a foreign exchange strategist with Arkera, in response to Rahman's findings. "And rightly so. No wonder why GBP markets are sitting on the fence. Everything to still play to decide if it'll be $1.20 or $1.40 GBP/USD world we end up in 2020."

The uncertainty on the outcome of the election is high, and this will help explain why Sterling is locked in such tight ranges against the majority of currencies.

"The most GBP favourable outcome is a large Conservative majority while GBP unfavourable outcomes are either a weak conservative majority or an outright Labour one," says Paul Meggyesi, an analyst at JP Morgan in London. "GBP could face a choppy couple of weeks unless Johnson is able to maintain or even extend his opinion poll lead."

Anything other than a clear-cut win for the Conservatives introduces another spell of prolonged uncertainty - a Labour government would scrap the existing Brexit deal negotiated by Boris Johnson and attempt to negotiate its own deal which could take some time, and then put it to another public referendum.

A further risk is that according to current polls, Labour would almost certainly only govern in a coalition and so would have to agree every decision from their coalition partners, something which could further slow down the process of negotiating a new Brexit deal.

“We certainly have not priced in anything like a Labour-type coalition, and if we did, it (the Pound) would certainly be an awful lot lower. We have priced out no-deal but we have not priced in any electoral certainty yet,” says Kinsella.

The Pound is unlikely to be moved much by promises from politicians on all sides to spend more on infrastructure and public services, even though these are generally seen as stimulatory for the economy.

“I am always more sceptical about politician’s promises in an election campaign,” says Kinsella. “They are all falling over themselves promising how much they are going to do but even if we enter a period of leaving the EU customs union, and leaving the EU single market, there is going to be an adjustment period there where we have slightly slower growth.”

Greater growth from fiscal amplitude would probably be offset by lower exports. A certain degree of uncertainty could continue for years until the UK and EU managed to hammer out a brand new trade deal.

“It (greater spending) should mean at the margin is slightly higher growth but that is in the environment of having lower growth on the trade side,” says Kinsella.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here.

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