It is with a heavy heart that I must inform you that there was yet another terror attack in the UK on Saturday. So far (at the time of writing) there have been 7 confirmed deaths and 48 people are currently being treated in hospital. Though it seems irrelevant to discuss currency movements or the elections at this point, the impact that this can have on the market and the results of Thursday's election must also be addressed.
Historically, horrific events such as what happened in London on Saturday have a negative impact on the country's currency straight away, and then there is a correction after the situation has been contained. As the markets are closed on the weekend and the situation has now been contained, we may not see anything major on Monday morning as far as a currency market reaction is concerned, but if you do see the pound slightly weaker, this will be why.
On to the elections...the week is finally upon us, the UK's public will go out on Thursday 8th June to vote for their new Prime Minister. I have written various articles detailing the effects of the campaigns and opinion polls leading up to the election. But now I think it is time to start thinking about what may happen after Thursday's results are in.
Over the last couple of weeks, we have seen the pound lose around 3% against most major currencies due to the uncertainties that have been brought about by this election. The market was initially confident that British PM, Theresa May would win by a sizeable majority, but it seems now various opinion polls are showing that this may not be the case. A quick disclaimer here, opinion polls are rarely correct!
The reason why the market was happy with a Theresa May win, was because it would be a continuity of agenda. Any form of uncertainty hurts the markets, and this is why the pound has lost so much value since the Brexit vote. The PM has already begun the process of Brexit, and many people would like her to see it through, as opposed to somebody else coming in and starting again. I feel that many voters are not voting on policy, but voting for Brexit again to ensure it happens! The common consensus is that if Theresa May wins this election with a decent majority (anything over 100)- then the pound will strengthen, this is mainly due to the fact that with a majority, Theresa May can continue with Brexit negotiations without too much opposition. (The faster Brexit happens, the better for the markets!).
On the flipside, the thought of a Labour win in this election is causing the pound to weaken, and according to opinion polls, Jeremy Corbyn has been eating away at Theresa May's winning margin and seems to be closing in. Currently, opinion polls are not pricing in a Labour win by majority, but are forecasting that a "Hung Parliament" is possible if the Conservative's don't manage to get enough seats. If this happens, many analysts are forecasting that Labour, SNP and the Lib Dems could form a coalition government.
The reason why the pound is weakening every time Corbyn seems to take a jump in the polls is nothing personal against him. It is simply because the markets do not like uncertainty- a new Government will mean a new stance on Brexit, (a softer Brexit I will add), and though this sounds great to many people in the long term - the short term does mean that the pound will weaken as a result.
For those of you selling the pound, the markets will be very thin leading up until Thursday, many traders will leave the pound alone until we have a result, so the pound will remain weak, which means that for those of you who are selling the pound, there will be ample opportunities leading up to the elections.
Following the elections, it seems that the consensus is still the same, a Conservative win will mean the pound will strengthen, and a Labour win will mean the opposite. It won't be as simple as this, of course, it will come down to the size of the majority the winner has- Please see below for a full breakdown of how which majority win for the Tories will pan out.
100 -125 seat majority: Very strong win, exactly what the markets are priced for. Sterling strength.
Fewer than 100: Still a successful result, Sterling would still react positively.
Fewer than 50: Would set fears of a "Hard Brexit" into the market- Possible weakness for the pound.
Fewer than 30: Could cause sterling to move lower.
Fewer than 20: This would be a "Red Alert" for sterling.
Fewer than 17 seats: This is close to the current majority, would cause the pound for weakening.
No Majority (Hung Parliament): Sterling weakness until there is a resolution.
And just to play devil's advocate, there is always a chance of a very convincing Labour win, if this were to happen I believe the pound may strengthen due to the certainty of a new leader and the public being behind them - in the short term we may see some weakness, but in the long term I think the pound would react positively.