Corbyn 'Nightmare' Haunts British Pound v Euro and Dollar

• The Pound to Euro exchange rate: 1 GBP = 1.1446, 24 hour high = 1.1553. >> See live rates
• The Pound to Dollar exchange rate: 1 GBP = 1.2843, 24 hour high 1.2888. >> See live rates

Pound Sterling was seen falling against the Euro and US Dollar overnight following the release of a poll that suggested the UK could be without a majority government following the June 8 poll.

The poll showed the Conservative’s losing their majority and leaving the UK with a hung parliament.

With a week to go before polling day the prospect of a rudderless country going into Brexit talks has given reason for markets to approach Sterling with caution.

"What was once portrayed as an opportunity to provide a stronger hand for Brexit negotiations is beginning to look like a nightmare which could add greater complexity to the already complicated process of negotiations," says Joshua Mahony, Market Analyst at IG. "Perhaps more worrying for the city is the prospect of an anti-business candidate coming into power at a time that we are realigning our economy to ensure that the negative impact of Brexit is minimised and the benefits of increased global trade are maximised."

As can be seen in the two graphs there was a discernible dip in Sterling against the Dollar and Euro at the time of the polls release.

What Happened?

At 22:00 YouGov released a poll for the Times that showed the Conservative’s were on track to lose their majority.

Recall that much of the Pound’s rally in the April-May period was premised on the assumption that Theresa May would be handed a larger majority that would give her a stronger hand in parliament while also taking away the need for elections in the Brexit transition period.

This poll is however different to others in that it is YouGov’s first constituency-by- constituency estimate of the election result.

It predicts that the Conservatives would fall short of an overall majority by 16 seats, leading to a hung parliament.

The party is forecast to win 310 seats against Labours 257.

A majority is achieved with 326 seats.

"A hung parliament is the nightmare scenario for May. It would constitute a massive personal failure and undoubtedly make for great domestic political uncertainty at the worst possible moment for Britain," says Neil Wilson, Senior Market analyst at ETX Capital.

What Does the Shift in Polling Mean for the Pound?

“The hopeful expectation that PM May had made a calculated move and was gunning for a bigger majority in parliament is now at risk as polls suggests that PM May may not win as much or could even risk having a hung parliament,” says Saktiandi Supaat at MayBank.

MayBank continue to stress that GBP direction will be determined by opinion polls over the course of the next week - if the narrowing of Conservatives’ lead is temporary or will continue.

“Further narrowing should see GBP unwinding its post-election announcement gains towards 1.25-1.26 levels. But a widening of the lead may limit the downside,” says Supaat on the GBP/USD outlook.

It is important to point out that we are not seeing any fresh lows in either GBP/USD or GBP/EUR which suggests the downside in Sterling looks pretty well contained for now and markets are taking the YouGov poll with a pinch of salt.

Indeed, more seasoned forecasters of the UK election are still anticipating a decent enough Conservative majority.

“The poll on which this is based in not comparable with the broader run of opinion polls and YouGov attaches a very wide margin of error to the results. Traditional polls continue to show the Conservatives’ lead narrowing, though less dramatically,” says Adam Cole, a strategist with RBC Capital Markets in London. “We are still negative on GBP but wary of drawing too many conclusions from the latest prediction.”

RBC Capital’s strategists went short GBP against EUR in their G10 trade of the week yesterday confirming they anticipate further weakness in GBP/EUR.

Analyst Karen Jones at Commerzbank tells us she is neutral on the Pound’s outlook against the Euro for now.

She notes that neither side has been able to do any damage to the other and says the exchange rate is neutralising which should lead to a period of sideways movement from here.

Can this Poll be Trusted?

However, there is certainly an element of caution amongst commentators as to whether the poll should be trusted which implies the damage done to Sterling could be relatively limited.

“We doubt that the Times/ YouGov research is giving us the true picture about how many seats each party will win on June 8th,” says Kathleen Brooks at City Index. “This was not a poll, rather it is the outcome of a model that has used untested methodology to come up with this hung parliament conclusion. Other polls are predicting a completely different outcome, so we would use this information with a pinch of salt.”

The latest Electoral Calculus findings suggest the Conservative majority stands at 92.

The Electoral Calculus predicts the General Election result using scientific analysis of opinion polls and electoral geography.

Martin Baxter who runs the Calculus has been making election predictions for twenty years and has more pedigree than YouGov's new method.

Nevertheless, YouGov stand by their new findings.

YouGov Chief Executive Stephan Shakespeare told The Times that the model had been tested during the run-up to the EU referendum last year and that it had consistently put the Leave campaign in the lead.

Similarities with the Scottish Indey Ref

In some ways this election campaign is starting to resemble the Scottish independence referendum in 2014.

Markets were unperturbed until the very end of that campaign when a solitary poll showing a majority in favour of independence caused a last minute jump in the political risk premium.

In response to this GBP fell by nearly 2%, 1m EUR/GBP volatility jumped from 5% to 11% and the 1m 25 delta risk reversal surged from parity to nearly six volatility points in favour of GBP puts over call (charts 4-6).

"Before getting carried away, however, it should be noted that the betting markets still have the Conservatives as overwhelming favourites to secure a majority, even though the odds on this have fallen by 5% to 86%," says analyst Paul Meggyesi at JP Morgan.