Pound to Trade as Low as 1.20 v Dollar, as High as 1.35 on Election Result
- Written by: Gary Howes
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Pound Sterling Live's ongoing coverage of foreign exchange market expectations and potential outcomes on the UK General Election continues with the latest viewpoint coming from global investment bank Westpac.
In a briefing to clients, released less that 24 hours ahead of the first ballot being cast, analyst Sean Callow warns that the Pound to Dollar exchange rate could be in for a wild night as the result becomes clear.
The reasons the event has become quite explosive from a currency perspective is the levels of uncertainty that have been woven into Sterling markets by Labour’s recent surge in popularity.
When UK PM May announced a surprise early election on 18 April, GBP/USD jumped almost 4 cents to above 1.29.
It extended above 1.30 in May, albeit with help from a softer US dollar.
In this period, GBP/AUD rallied from around 1.65 to early May highs above 1.75.
“Price action has made clear that the pound’s strength – at least short term - is positively correlated with the outlook for the current Conservative government,” says Callow.
The common assumption when the election was announced was that the Conservative Party were taking advantage of their very large lead in the opinion polls to substantially increase their current 17 seat majority in the 650 seat House of Commons.
“The sharp rise in the Pound at that time matched optimism from PM May that the Conservatives would enjoy a comfortable majority that would strengthen Britain’s position throughout the Brexit negotiations and beyond,” says Callow.
Above: May goes on the offensive just hours before polls open with promises to take a more robust approach to security.
The Labour Party is running on a policy platform viewed as notably more radical – and less business-friendly - than under the Blair-Brown Labour governments from 1997 to 2010.
This produces profound questions for the outlook of the economy.
The Conservatives’ lead in the polls began to be trimmed from early May, with its primary vote in poll averages peaking at 49% on 7 May, falling to 40% by early June.
Releases of polls showing a tighter race or even a hung parliament have produced knee-jerk falls in Sterling.
Callow says a photo finish or a hung parliament remain only low probabilities.
“But even consolidation of the existing Tory majority – say 15-20 seats – is seen by some pundits as a poor enough performance by PM May to hamper her leadership and embolden MPs arguing for a “hard” Brexit,” warns the analyst.
What the Pound Could Do
Given a backdrop of uncertainty and multiple outcomes, “the Pound seems set for volatile trade as the results come in on Friday,” says Callow.
The baseline scenario held by Westpac is for the Conservatives to retain a workable but not huge majority, which should prove modestly positive for the Pound, at least initially.
This contrasts with the views held at other investment banks, for instance UniCredit are expecting the Conservatives to win big.
Nevertheless, as the Brexit vote showed, markets will need to consider what could happen in the event of a surprise result.
Hence, nerves should prevail.
“The pound seems set to be quite volatile as the results are revealed, with GBP/USD potentially anywhere from sub-1.20 to 1.35 in the most extreme scenarios.”
Westpac’s cheat-sheet is as follows:
Conservative landslide (75-100 seat majority): GBP/USD 1.35
Conservatives win workable majority (20-40 seats): GBP/USD 1.30-1.32
Conservatives win most seats but a hung parliament: GBP/USD 1.22-1.25
Labour majority: GBP/USD 1.19-1.20
No Labour win but minority parliament scenario is seen. Interestingly, analysts at Deutsche Bank say this is in fact the most positive outcome possible for Pound Sterling longer-term.
Consensus Predictions for Sterling-Dollar
A poll of foreign exchange analysts conducted by Bloomberg shows that a hung parliament could see GBP/USD fall to 1.2350.
A large Conservative majority would see a rise to 1.31 while a small Conservative majority would see gains limited to 1.3025.
A Labour win on the other hand would see the exchange rate fall down to 1.2484.
The survey covered ABN Amro, BNY Mellon, CBA, CIBC, Mizuho Bank, MUFG, Nomura, Rabobank, Royal Bank of Canada, Saxo Bank and SEB.
