Bookmakers Cut Odds on May Win, British Pound Firms Against Euro and Dollar as a Result

• Quotes (7-6-17):
• Pound to Euro exchange rate: 1 GBP = 1.1460 EUR, up 0.14%, day's best: 1.1463, low: 1.1438
• Pound to Dollar exchange rate: 1 GBP = 1.2911 USD, up 0.04%, day's best: 1.2913, low: 1.2895

One day to go before the UK General Election and Pound Sterling is seen consolidating having recently bounced off lows against the likes of the Euro and Dollar.

No doubt traders will be keen to sit on the sidelines heading into the event incase the British public deliver another market-moving surprise.

It would appear that the source of the gains lies with an increased confidence amongst financial market participants that Prime Minister Theresa May will secure an expanded majority.

Most analysts we have heard from say such an outcome would be beneficial for the value of the Pound.

However the polls released at the start of the new week were not necessarily supportive of such an outcome with the latest ICM poll confirming a good lead for May, but a smaller lead than previously reported.

Rather, we believe the answer lies with the betting markets which have shown a pick-up in support for May amongst punters.

If you also consider a currency trader to be a punter, broadly speaking, then you can see the linkage.

After all, the movement of the Euro to Pound exchange rate of late has shown a good correlation with the Conservative’s advantage over Labour:

”EUR/GBP has moved in tandem with the election polls in 2017, and especially since Theresa May called for snap elections in April,” says Andreas Steno Larsen, an analyst with Nordea Markets who confirms markets will remain tuned to the election and nothing else over coming days.

Bloomberg report that, privately, Labour Party officials and candidates are preparing to lose dozens of seats.

A party aide speaking on condition of anonymity said officials had informally generated a list of more than 30 districts they have no prospect of holding.

Three candidates, all fighting to hold seats, said their experience canvassing for votes bore little relation to the polling, with districts where Labour had majorities in the thousands at risk.

The figures being talked about here tally more or less with the 72 seat majority currently being projected by Electoral Calculus.

Lord Ashcroft's latest poll meanwhile sees the Conservatives walking away with a majority of 64 seats.

Bookies Slash Odds on May

Oddschecker have confirmed that 85% of money staked on Prime Minister following election market has been on Theresa May since she addressed the nation on Sunday, June 4.

It is also reported that five bookmakers have cut odds on Theresa May being PM following election.

“With the tragic events in London over the weekend following the upsetting scenes witnessed in Manchester just weeks before, Theresa May’s warning that ‘enough is enough’ appears to have resonated with the British public,” say Oddschecker in a briefing seen by Pound Sterling Live.

Above: Prime Minister May's initial response to the London Bridge terror attack where she says "enough is enough"

The Prime Minister warned that there had been “far too much tolerance of extremism” and has promised to step up and fight terrorist organisations.

“Since May addressed the nation on Sunday morning, over 85% of the total staked on the Prime Minister following the General Election market has been on Theresa May, a stark uplift from last month where May only accounted for 40% of stakes placed on the same market,” say Oddschecker.

The increase in support for the current Conservative leader has forced bookmakers to cut their odds with five different firms on Oddschecker shortening their odds for May to retain her position after June 8th.

The current PM is now as short as 1/6 to be in charge following the General Election on Thursday whilst Labour leader Jeremy Corbyn still remains in contention at 4/1 - a vastly reduced offering when compared to the odds being offered earlier on in the campaign.

Trend Reflected in the Foreign Exchange Market

For analyst Kathleen Brooks at City Index, the options market is a better gauge of investor sentiment leading up to this election.

Brooks observes 1-week risk reversals, which measure the amount of downside protection investors’ are buying, are at their highest level since before the EU referendum last year.

However, 1-month risk reversals suggest that investors were buying more GBP/USD and GBP/JPY downside protection in October last year, when Theresa May threatened a hard Brexit.

"This suggests to us that sophisticated GBP traders are not worried about the prospect of a Hung parliament and drawn out negotiations to form a coalition government. Thus the market is looking for a one-party government from this election, although which party it will be is still up for grabs if you believe some of the opinion polls," says Brooks.

Polls to Watch

With polling having an important bearing on the Pound, we would suggest those with an interest in the market keep an eye on the next tranche of polls.

Tuesday:

Kantar, due to be published around 3:30.
Opinium, due sometime in the evening

Wednesday:

IPSOS Mori, 11:00 AM
Panelbase, afternoon
Comres, evening
ICM/Guardian, late afternoon, early evening

Anytime:

YouGov

What About Other Sectors?

The Pound is understandably likely to be the conduit of sentiment in the upcoming vote, but what about other markets?

John Wyn-Evans, Head of Investment Strategy at Investec Wealth & Investment looks at other sectors that could potentially be impacted:

Large capitalisation equities will continue to follow global trends owing to their heavy overseas earnings exposure, with a weaker pound providing something of a boost.

Mid and small-cap equities with more domestic exposure would fare less well under a weaker pound, reversing some of the recovery they have made as the pound rallied and the economy surpassed most expectations.

Gilts also tend to follow global trends, but, as we saw last summer, can benefit from their safe haven status in uncertain times.

However, we suspect that they would not react so well to “tax and spend” Labour plans, even though Labour offers a “softer” Brexit. Also, with a yield of just over 1%, the conventional UK 10-year gilt continues to offer little return.

We have a marginal preference for Index-Linked Gilts which offer protection against inflation caused by a weak pound.

Putting all this together, we find it difficult to make a case for specific evasive action ahead of Thursday, especially as the betting markets still find a decent Conservative majority to be the most probable result. If not, our existing exposure to non-UK assets will provide a decent cushion.