As the General Election approaches on 12th December, the polls suggest that we will see a Conservative majority. However, some recent polls have shown Labour narrowing that lead, as they did ahead of the 2017 election. There has been a direct correlation between how sterling performs and the chances of a Conservative majority, with sterling higher as a result. GBPUSD is currently above 1.30, and GBP/EUR around 1.1750.
In 2017, the original lead narrowed and no party had a majority. This could easily happen again as we go into the final week of campaigning. This time, however, if there is no majority, expectations are for a Labour government to be more likely to form a minority government.
Polling stations will close at 10pm on Thursday 12th December. Results from each of the constituencies will come in through the night, with a good chance that the result is known in the early hours. We expect most of the volatility in sterling to occur during the night as results come in. The final results will be available mid-morning on Friday 13th.
Market forecasts are for a 3-5% increase in the value of sterling in this case (though that will depend on moves in the run-up to the election). This would give clarity to the Brexit process with agreement on the Withdrawal Agreement likely and the UK expected to leave the EU prior to the end January deadline. MAYBE cut out – This would then shift the focus to the negotiation of a new trade deal, with sterling fortunes likely to refocus on those discussions.
This outcome would lead to significant uncertainty over how we move forward to form a new government, with a Labour minority government more likely. Sterling would likely drop several % in response to this outcome given the recent moves we have seen.
Whilst highly unlikely, this would potentially represent the largest downside for sterling with some analysts suggesting a 4-5% depreciation. However, although Labours plans of Large-scale borrowing and increased taxation, the potential for an EU referendum may provide a longer term boost.