GBP outlook ahead of the UK Election Wednesday 31/05
GBP has come under attack as polls have narrowed ahead of the UK General Election on the 8th of June 2017. The Conservatives have gone from a lead of 18 points over Labour to 7 points (according to some prominent polls) since the general elections were called on 18th April. The fringe parties like the Liberal Democrats, UKIP and Green have been decimated as vote share has concentrated around the two main parties.
The cause of the latest chatter on the trading desks was the You Gov Projection piece for the Times where the pollster predicted a hung parliament on June the 8th. You Gov carried out a projection based on 50000 interviews as supposed to a normal survey with a sample size of a couple of thousands.
The projections showed that PM Theresa May will win 310 seats (out of 650 seats) which mean that conservatives will come down from their previous tally of 331 seats (a majority) in the previous general elections. The Labour will be number two at 257 seats which also means there will be a hung parliament.
The Times reporter Sam Coates who published the predictions has already said that these results will be updated daily which will keep the GBP choppy unless we see a clear trend. That said, there are some questions regarding the methodology used by YouGov with the Independent and the Guardian already calling it controversial. Also, there is an error rate according to which Conservatives may achieve 345 and Labour 227, hence these projections should be taken with a pinch of salt.
YouGov predictions have pushed GBP lower but the market has already started to question these forecasts as the latest polls (PanelBase and Kantar) showed Conservatives still having a healthy lead of over 10 points. The election polls will need to confirm the You Gov predictions and polls will have to confirm each other. The bottom line is that the market will need a consistent trend in polls against PM Theresa May over the next seven days for GBP to drop sharply. In our view, GBP weakness is further to run if polls continue to narrow. That said GBP may remain choppy if poll keeps contradicting each other.
In terms of levels to watch before the results;
GBPUSD 1.2772 1.2902
EURGBP .8656 .8787
What is likely to happen if Theresa May wins;
We expect GBP to improve because her stance on Brexit is more or less known and the market will see her win as “business as usual”. Also, inferring from the Conservatives manifesto it is likely that public spending cuts will be deep and fiscal discipline will be stringent. That said there can be some risk if May comes in with a slim majority as it will make it difficult for her to negotiate Brexit and pass important legislations through the House of Commons.
Conservative Majority (340 seats or above)
Conservative Majority (340 seats or below)
What is likely to happen if there is a hung parliament?
In a scenario of Conservatives missing the 326 mark, there will a hung parliament with a lot of uncertainty over Brexit and fiscal policy, given Labour and Conservatives divergent views.
Hung parliament (325 seats or below)
We don’t see a majority or a coalition that could see the Labour government in power but in such a scenario GBPUSD and EURGBP could hit 1.2550 (-2%) and .8900 (+2%).