What’s next for Sterling after Theresa May calls for General Election?

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Britain is heading for an earlier than expected General Election this year after Prime Minister Theresa May unexpectedly called for a snap vote in April. The comfortable majority vote in the House of Commons means that the UK will now go to the polls on 8th June 2017, three years earlier than originally intended.

But what does this mean for the currency markets? We outline the key dates to consider and what impact the General Election may have on the Pound.


Timeline

18th April - Theresa May calls for early election
Sterling surged by over 2% against the US Dollar, and over 1.5% versus the Euro, after Theresa May’s shock announcement outside Downing Street that she would be seeking to hold a snap General Election in June (Figure 1).

Figure 1: GBP/USD & GBP/EUR (13/04/17 - 21/04/17)

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Source: Thomson Reuters Date: 21/04/2017

19th April – MP’s vote in favour of election
MP’s overwhelmingly backed Theresa May in her pledge to hold an election. The House of Commons comfortably passed the motion, with 522 of the 535 votes cast in favour of the proposal, including leader of the opposition Jeremy Corbyn.

29th April – EU Summit
Member states of the European Union, excluding the UK, met in Brussels, with EU leaders unanimously agreeing tough negotiating guidelines for Brexit talks with the UK.

3rd May – Parliament dissolved
The UK Parliament was dissolved 25 working days prior to the election, as determined by the Fixed-term Parliaments Act 2011. Members of Parliament will now cease to be so until after the election.

4th May – Local and Mayoral Elections
The local and mayoral elections took place, with a total of 4,851 council seats up for grabs in 88 councils. At the time of writing, the Conservatives have made considerable gains over Labour, boding well for their chances in June. While this is of course separate to the main General Election itself, it gives us an early indication as to how the actual vote may play out.

11th May – Candidates deadline
This marks the deadline for nominations to be submitted, the 19th working day before polls open under European Commission rules.

8th June – Election Day
Britain will go to the polls for the second time in a little over two years, adding to the docket another potentially significant political event risk in Europe in 2017 that will see similar elections in France and Germany.


What are the opinion polls saying?

The gap between the Conservatives and Labour has widened considerably since the last election in 2015. According to the most recent opinion polls, the Conservatives are very likely to significantly improve their position as the largest party. The Tories have consistently polled in excess of 40% since last summer, with a recent poll from YouGov giving Theresa May’s party a 24 point lead at 48% to 24%, the largest lead it has opened under the existing government’s tenure.

This has been reflected by online Prediction website PredictIt. PredictIt is currently giving the Tories a mere 4% chance of obtaining less than the 330 seats that they currently hold, and a sizable 44% chance that they will obtain more than 390 seats of the 650 available. This would mark the largest number of seats obtained by a Conservative Government since Margaret Thatcher won her second term in office in 1983.


How has the market reacted?

Currency markets have reacted in a sanguine fashion to the prospect of an early election. As we have already outlined, the Conservative Party have opened up a considerable advantage over Labour, which is currently polling at its lowest level of support since 2009.

We think the election will be good news for UK assets, including Sterling. It should strengthen Theresa May’s stance within her own party. It may also give the Prime Minister a firmer footing in negotiations with the European Union, greater political latitude and improve the likelihood of a ‘softer’ Brexit. Moreover, the new term of Parliament will stretch out to 2022, rather than 2020, which should give the Conservative government more time to negotiate a better deal with the EU. It's looking increasingly likely that negotiations with Europe will take longer than the two years outlined by Article 50, which was triggered by Theresa May back in March. Further, the massive defeat for Labour as suggested in the polls signals that the electorate is not on board with the significant tax increases on capital and wealth that are implicit in the current Labour platform.

The improved sentiment towards UK assets has already been reflected in the Pound, which has soared to its highest position in six months against the US Dollar following Theresa May’s announcement that she planned to hold another election (Figure 2).

Figure 2: GBP/USD & GBP/EUR (May ‘16 - May ‘17)

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Source: Thomson Reuters Datastream Date: 05/05/2017

We have been saying for a number of weeks now that the market is currently pricing in just about the worst case scenario to Brexit negations. The prospect of an earlier-than-expected election should alleviate some of these concerns, and we expect an upward correction in the Pound this year as investors begin to come around to the idea that the effect of Brexit on the UK economy may not be as severe as initial feared.

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