Following some turbulent trade yesterday the FTSE 100 and sterling are rather more subdued this morning, as markets digest the potential impact of the unexpected snap election going forward. The pound is edging higher against most its peers but remains below Tuesday’s highs whilst the FTSE is lower by 5 points at the time of writing.
Sterling strength has more room to run
The pound reacted positively to Theresa May’s announcement yesterday morning and rallied strongly throughout the day to trade at its highest level against the US dollar since early October. GBP/USD remains above the 1.28 level this morning, and with the latest positioning data showing a near record-level of net short positioning there could be more legs to this move yet.
The price action yesterday was suggestive of some short covering with the rally higher grinding steadily throughout the day, before a capitulation in the evening saw a spike of approximately one percent in under a minute. This was likely caused by a large short position covering once 1.28 was broken above. Whilst far smaller in scale than the flash-crash last year, nonetheless the move serves as a reminder that heightened levels of volatility going forward are likely.
Greater power to allow softer Brexit?
The main fundamental reason for the sterling appreciation was seemingly the concept that a greater majority amongst MPs would allow PM Theresa May more leeway when it comes to negotiating the Brexit terms with Europe. At present the conservatives enjoy a narrow majority of just 17 and this would mean that May can’t afford to ostricise too many Eurosceptic backbenchers on the Brexit terms.
Therefore the move to call a snap election seems strategically sound and a wise choice given that recent polls suggest that the outcome would yield a majority in excess of 100 MPs and afford greater political maneuverability. This school of thought however rests on the polls proving to be an accurate gauge and at present the decision appears to be a calculated risk worth taking, given that her expected lead is the largest in over a generation.
However, as a note of caution the last time Britain called a snap election was in 1974, when Conservative Prime Minister Edward Heath was battling striking coal miners. Rather than strengthen his position the result was a hung parliament and even though this outcome appears unlikely this time, out it remains a possibility and would represent the second major miscalculation by a PM in as many years.