GBP traders and brokers are braced for a late night on Thursday as the UK goes to the polls. For forex traders it will be a sleepless night as original GBP optimism over a big Conservative victory starts to evaporate going into the critical election day.
“No matter which way the chips end up falling, expect big volatility overnight in GBP currency pairs and a choppy open for the FTSE100 and UK stocks,” says Adam Vettese, UK market analyst with eToro. “On the whole, the market would prefer a Conservative majority and could see a rally in UK shares. However, a hung parliament or a shock Labour victory would see uncertainty prevail and open up a whole new can of worms.”
Sterling will suffer a hard drop if there is anything other than a Tory majority, but whilst there is a risk of a buy-the-rumour, sell-the-fact trade at work, there should also be a bit more upside should the Conservatives secure a strong majority – a Boris Bounce perhaps.
“Given that the pound has yet to move anywhere near its post-Brexit highs there is room above, though much will depend on the course of events after the election to secure $1.40 again,” explained Neil Wilson, Chief Market Analyst at Markets.com “Moreover there is enough doubt about the outcome now to create some entry points.”
What could happen to the FTSE after Election Night?
UK equities would move in tandem – the FTSE 100 could fall under 7000 should the pound start to run the stops to the upside, whilst the FTSE 250 would likely make further gains and break the 21000 level again. In contrast, instability at Westminster would benefit the FTSE 100 and hit domestic equities on the 250 harder.
The market has been particularly worried about the possibility of a hung parliament and any news that points in that direction has led to some selling of the GBP. Polls have been remarkably consistent in showing the Conservatives with a lead of around 10 points throughout the campaign. Whilst Labour has made ground, this has been largely at the expense of early runners the Lib Dems, as Remain voters have switched to, or back to, Labour.
The latest YouGov MRP poll has, however, thrown the cat among the pigeons. It’s still the Conservatives’ election to lose, but the polling shows a narrowing in the Tory lead from 12 points to 9 points. Critically the margin for error is such that a hung parliament is a possibility.
This poll puts the Conservatives on 339 seats, well clear of the 326 needed for a majority, with Labour trailing on 231 seats. The Conservative majority is forecast at 28, but that is down from 68 signalled by an earlier poll based on the same model carried out in November.
What is the likely impact?
Wilson at Markets.com says a Conservative majority looks ostensibly market friendly. He says the GBPUSD would move to trade in a range of 1.35 to 1.37, into an area the market traversed in September 2017, with a possible attempt at the 1.38 level, a major 38.2% retracement zone.
Wilson reckons upside will be capped by Brexit, specifically possible concerns about the future trading relationship with the EU. A small Conservative majority raises the prospect of ERG dissent in the ranks vis-a-vis extending the transition period and doing a deal with the EU, essentially a hard no-deal Brexit could yet be on the table. A large majority gives the UK government a veto over ERG and others, and can ram home any deal to ‘Get Brexit Done’.
“Speculative positioning has already come around – net shorts are a about a third of what they were, but we are yet to see speculators turn net long sterling,” Wilson said.
In the event of a hung parliament there could be an immediate near-term slump in the pound to 1.28 and possibly retreat to 1.26 depending on outcome.
From a hung parliament there are a range of possible scenarios that would need consideration. This includes the possibility that Labour could form a coalition, that Boris Johnson could get DUP backing to form a government, or even that Johnson sould end up forming a minority government. In these cases the GBPUSD could be back to the 1.20 level.
Traders planning to be active in the market over Thursday and Friday are going to be facing some very high levels of volatility. Brokers are warning traders of GBP and EUR pairs to be extra cautious with their stops and it is also highly likely that we will see some widening of spreads and possibly even further restrictions on margins during the period before a new government is in place.