Pound Sterling Holds Highs vs. Euro & Dollar Ahead of YouGov's Final MRP Poll

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- Pound-to-Euro exchange rate @ 1.1887

- Pound-to-Dollar exchange rate @ 1.3154

- Sterling to rally if MRP poll shows Con/Lab gap at +11%

- But, Sterling at risk if MRP poll shows slim majority

- One economist says shock hung parliament still possible

Pound Sterling is trading within touching distance of a 31-month high against the Euro and a 7-month high against the U.S. Dollar on Tuesday, December 10., with market participants likely to hold current levels ahead of the release of a key poll, due for release tonight.

YouGov are to release their final MRP model of the campaign at 10PM, and foreign exchange markets will likely trade the outcome as it is considered a potential guide to Thursday's result. However, we warn readers that the the broad outline of the last MRP model were leaked ahead of 10PM, and the Pound was seen moving in response.

The MRP model takes YouGov's latest polling statistics and projects them into seats; it is considered to be the most detailed and accurate form of polling currently being deployed and it correctly called the hung parliament that resulted from the 2017 General Election.

The British Pound has been closely tracking expectations for the Thursday vote, rising as the odds of a Conservative majority rise. "A Conservative majority means the new government will be able to ratify the EU Withdrawal Agreement before the end of December. The predicted majority implies that the new government will not have to rely on the support of the Democratic Unionist Party (DUP), meaning that the DUP will be unable to frustrate or stonewall the ratification of the EU Withdrawal Agreement," says Peter Kinsella, Global Head of Forex Strategy at Union Bancaire Privée (UBP).

Above: Sterling-Euro has been trading higher on the promise of a Brexit deal finally being delivered.

Sterling rallied sharply following the release of YouGov's first MRP model on Wednesday, November 28. which showed the Conservatives were on course to achieve a majority of 68.

But should the YouGov MRP model suggest the odds of a majority are not as high as market expectations, there is a risk Sterling could correct lower. If the result suggests a larger majority than markets might be expecting, Sterling could add to its gains. Stephen Gallo, a strategist with BMO Capital Markets says he expects "the bid tones in the GBP and the EUR vs the USD to persist at least into" the release of the MRP model.

"If the CON/LAB gap is 11% or better, we would expect the rallies in GBP/USD and EUR/USD to continue. Please note that the results of the late-November MRP appeared to have been "leaked" early," says Gallo.

The polls have however tightened since the November MRP release, and the expectation is that the final projections of the campaign will indicate a much closer race.

There is a heightened chance that markets take some exposure towards Sterling off the table at some point over coming hours as they prepare for potential downside on the MRP model's release and the actual result of the vote itself.

"Anything sub 340 will not be welcomed by the market, 330 is when the shine starts to come off as ERG remain key players here," says Jordan Rochester, Global FX Strategist with Nomura.

The ERG is the European Research Group of eurosceptic Conservative MPs, who advocate for as much divergence from the EU as possible. If Johnson's majority is small, it gives this group of MPs more power in Parliament than would be the case under a large majority.

The fear is that the ERG could hold back the signing of a future trade deal if they deem it to be too soft.

Above: The November MRP showed the Conservatives were on course to win 359 seats.

BMO Capital Markets say they understand YouGov continues to tweak its methodologies to account for factors such as voter turnout, the "youth vote" and tactical voting on a seat-by-seat basis.

On this basis, the MRP model is tipped to be the most accurate estimate to-date before the exit poll is released on Thursday at 22:00 GMT.

"We would expect GBP/USD to reach 1.33 if the current average of the polls is reflected in the final result on Thursday/Friday," says Gallo. "We're still very reluctant to call this result, and we suspect that "uniform swing" expectations are not all that helpful this time around due to the Brexit factor."

Polling out of YouGov on Monday meanwhile caught market attention as its findings for voting intentions in Wales - a traditional Labour heartland - showed the Conservatives are on course to make "significant gains" in the country.

An exclusive poll carried out by YouGov on behalf of ITV showed that with just three days to go until polling, the latest Welsh barometer poll shows the Conservatives closing the gap on Labour and winning eight seats from the party.

This in itself represents a significant swing, and will further buoy expectations that the Conservatives will clinch a majority.

Above: Politico's Poll of Polls, showed the Conservative lead sits at the 10 point mark at the start of the week

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Beware the Labour Surprise

Is there however a risk the market is becoming to complacent in its approach to Sterling?

While the market has convinced itself a Conservative majority is by far the most probable outcome of Thursday's vote, "it is not set in stone," says Samuel Tombs, UK Economist with Pantheon Macroeconomics.

Tombs says there remains scope for a last-minute swing in public opinion, which could rob the Conservatives of an outright majority.

"For a start, the latest YouGov poll shows that 13% of voters still are undecided; such voters are automatically excluded from the headline vote share numbers reported by pollsters. This proportion is slightly higher than at
the same stage before all of the last four elections," says Tombs.

Furthermore, Tombs says undecided voters currently are disproportionately from left-leaning backgrounds. "11% of Labour voters in 2017 don’t know how they will vote on Thursday, exceeding the 9% share of former Tory supporters."

As such, should the undecided voters ultimately 'go home', it would be Labour who would stand to benefit the most, at least based on past experience.

"Our key point is that a wide range of election outcomes still are in play at this late stage, given that voting intentions are softer than in the past, and U.K. polls often are wide of the mark," says Tombs.

Indeed, The Telegraph reports on Tuesday that Jeremy Corbyn is “much closer” to becoming prime minister than voters think because he could get into Downing Street without winning a single extra seat. 

The newspaper quotes a Conservative Party memo, dated December 7., says the chances of a Corbyn-led coalition have been "seriously underestimated", as gains of just 12 seats by the SNP, Liberal Democrats and other minor parties would be enough to remove Boris Johnson from No 10.

The report says internal Conservative polling shows a hung parliament would be the result of “as little as a 1 to 2 per cent movement in the current vote in a handful of seats”. Remain campaigners have meanwhile calculated that just 40,000 strategically targeted votes spread across marginal constituencies would be enough to swing the result in Mr Corbyn’s favour.

The Pound's ongoing bout of appreciation has as much to do for expectations of a Conservative majority as it does with relief that Labour are unlikely to take control and deliver their radical economic manifesto. Investment analysts and currency strategists we follow have warned of the substantial downside risks to the value of Sterling in the event of Labour winning.

"Institutional and private investors are petrified at the prospect of a Labour government. This explains why some UK assets, such as mid-cap equities trade at significantly lower multiples than their continental European equivalents. The prospect of a Labour government, alongside Brexit related uncertainty, has led to severe underinvestment in UK assets over the last four years," says UBP's Kinsella.

However, Labour's Shadow Chancellor John McDonnell says the Pound will actually rise if Labour win on Thursday. He told activists last week:

"My fear is that the Pound will start going up because of our investment plans... that's all the advice we've been getting."

Nigel Greene, CEO of the deVere Group - a wealth management company - disputes this view and has warned that the Pound would likely come under significant selling pressure on a Labour win.

Greene says Labour leader Jeremy Corbyn is a leftist firebrand whose "anti-business, low-profit, high-tax policies - including a possible wealth tax - can be expected to spook the financial markets, damage long-term sustainable growth of the British economy, put more pressure on UK financial assets, and lead to a significant sell-off of the Pound."

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