Above: Voting intentions are driving Sterling at the current time. Image courtesy of RBC Capital Markets. Data sources: RBC Capital Markets, YouGov, ICM, Ipsos, ComRes, Opinium, Deltapoll
– Pound-to-Euro exchange rate today: 1.1684
– Pound-to-Dollar exchange rate today: 1.2906
– Brexit Party not contesting additional 43 non-Conservative seats
– Sterling tracks odds of Conservative majority
– Unpredictable electorate make current highs look expensive
Pound Sterling was seen firming up ahead of the weekend on news that the Conservative Party won’t be facing a challenge from the Brexit Party in more seats than they had anticipated.
According to analysis of the electoral playing field, the Brexit Party is not standing in 43 seats that are currently not held by the Conservatives, but crucially, where the Conservatives came second in the 2017 election.
11 of these seats are held by Labour and are therefore seen to be potential targets by the Conservatives who will be looking gain a majority in Parliament.
The Pound was seen to have caught a bid when the news was relayed across the newswires at around 14:00 GMT:
The Pound had been softer through the course of the Friday session, but the news that the Conservatives have a clearer shot at forming a majority on December 12 has allowed Sterling to cement itself as the week’s best-performing major currency.
“Why would a victory for Boris Johnson’s Conservatives be a positive for U.K. financial markets and the British pound?” asks Erik Nelson, Macro Strategist at Wells Fargo, the international investment bank. Nelson says the narrative goes something along the lines of:
“Conservatives win a majority, ratify the WAB, the U.K. leaves the E.U. with a deal and moves on to longer-term trade talks. There are few if any certainties when it comes to the Brexit process, but we can say with a reasonable degree of confidence that if the Conservatives win an outright majority, they will be able to ratify the WAB and leave the E.U. with a deal. This is the scenario we currently view as the most likely, and is our baseline assumption.”
While Sterling is tracking higher on the odds of Conservative majority, foreign exchange strategists at RBC Capital Markets warn the British Pound is looking overbought at present, and that the currency could be sent lower should the UK electorate surprise and opt to not deliver a Conservative majority government.
“It would take a strong showing in only a small number of seats to remove the majority that most seem to expect,” says Adam Cole, foreign exchange strategist with RBC Capital Markets in London.
The British Pound has this week advanced on the majority of the major currencies amidst a shift higher in odds of a Conservative majority Government.
Last Friday the implied odds of a Conservative majority were at around 40%, by Monday they had leapt to above 60% after the Brexit Party said they would not field candidates in existing Conservative seats.
The Pound went higher in sympathy with this shift in odds, “markets now appear to be priced for a high (63%) likelihood of a majority Conservative government. And GBP price action suggests a strong market preference for this outcome,” says Cole, in a strategy note to clients out on Friday.
The GBP/EUR exchange rate has steadily climbed through the course of the week to record a fresh six-month high at 1.17026 on Thursday. At the time of writing the exchange rate is at 1.1684.
The GBP/USD exchange rate has also edged higher through the course of the week to reach highs at 1.2878 on Friday, however broad-based Dollar strength means that while GBP/USD is yet to rediscover the October higher towards 1.30.
Nevertheless, ahead of the weekend Sterling is holding a weekly advance against all the majors, save for the New Zealand Dollar which was turbo-charged by the Reserve Bank of New Zealand’s decision to keep interest rates unchanged this week.
While Sterling is on the front-foot, Cole warns that the currency is now looking to be overpriced considering how unpredictable the UK electorate has become over recent years now that Brexit has broken previous party alliances.
“UK voters have also shown unprecedented volatility and propensity to switch in recent years and what the polls say today may change materially in the next four weeks,” says Cole. “On balance, we would say most of these risks currently suggest a bias to GBP being slightly overbought as the rally on this week’s Brexit Party announcement overstates the impact on the election outcome.”
Cole, and we would imagine others in the market, will be worried of a repeat of the 2017 election where the Conservatives squandered an impressive 18 point lead at the start of the campaign and ended the vote with a 2 point advantage.
“It is early days, but the rise in their vote share in the current campaign is so far following a similar path,” says Cole. “Compared to what the polls say now, things may look very different in four weeks’ time.”
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A question for those watching the British Pound over coming days will be whether Labour’s improvement in the polls can continue. As the graphic at the head of this article shows, for now the Conservatives have also been able to match the Labour improvement.
However, if the Conservative’s lift stalls, Boris Johnson and his team will hope the Labour lift also stalls in order to ensure the gap between the two parties remains around 10 points.
This is key, because most seat projection calculations suggest that a gap of 10% translates into a majority in a first-past-the-post electoral system.
The public reaction to the Labour Party’s latest election pledges will be key; late on Thursday Labour’s Shadow Chancellor John McDonnell announced:
“I am excited to announce that Labour will deliver free full-fibre broadband to all individuals and businesses by 2030: fast, secure, reliable internet connections for everyone.”
How this will sit with voters remains to be seen, but it represents another decisive turn away from the centre ground that parties have occupied when it comes to the management of the UK economy.
The policy involves the part-nationalisation of telecoms group BT, yet another private entity that would be confiscated under a Labour government. Thus far the polling suggests Labour’s policy of confiscating private assets is a vote winner.
But again, the electorate are incredibly hard to predict at this election, and there remains a strong chance that more former Labour voters ‘come home’ as was the case in 2017.
Indeed, these are risky times for those betting on further advances in the Pound.
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