Pound gives back election gains as Boris maintains strong Brexit stance

The Pound has almost given up all of its election exit poll gains as Boris looks set to take a hard line on the UK Brexit transition period.

Mr Johnson is expected to use his new majority to pass a bill which forbids any extensions to the planned transition period beyond the end of next year. This would leave trade negotiators with only 11-months to strike a new trade deal or risk the UK moving into WTO terms with the EU (aka a hard Brexit).

This has surprised many in the market as some traders felt that his new large majority might have meant that he takes a more softened stance to the negotiations. Many analysts feel that 11-months is not enough time to arrange such a deal and therefore uncertainty has increased and the Pound has suffered a reality check after such a short-lived reprieve.

That said, it’s possibly too early to get overly pessimistic as the trade negotiations are yet to properly kick off. Furthermore, it can be argued that the overall structure of a deal has been laid out and a lot of things will remain the same after the split. However, with the pound failing to break the higher technical levels after the election swing, it seems that any further gains will now be constrained and the election highs may represent the top of the new range in the short-term. Brexit headlines, along with some technical moves, will likely be the main driving forces for the Pound in the near-term.   

As a result, the Pound is down over 2-cents against both the Euro and the USD since Friday. Eyes will now move over to Thursday’s Bank of England interest rate meeting to see if any of these political developments have changed any of the policymakers positions.

Sterling soars after Tory landslide

The Conservatives have won a massive majority in yesterday’s general election which has moved the markets. 

The Pound soared higher by around 3% just after the release of the exit polls (around 10pm) which indicated a landslide Tory victory.  As the results came in overnight they showed the exit poll was accurate and sterling largely held onto these gains. The Conservatives have won a majority of 80 seats.

The result means that Boris can now ratify his Brexit withdrawal deal and the UK can officially leave the EU on the 31st January 2020. We’ll then enter a transition period during which a future trade deal will be negotiated with the EU. Boris pledged to have this all agreed before the end of next year which could be a big challenge. Although this period could technically be extended to 2022, it would go against what Boris had previously promised. However, the larger majority means that Boris now has the ability to overrule the more hard-line Brexiteers (e.g. ERG) so we might not see as much of a hard Brexit. 

All of this is good news for the Pound and the fact it remained relatively stable around the peaks of the initial move shows that there is some good underlying support for sterling. As a result, Sterling had one of the biggest one-day gains of the last two decades. It hit the highest levels against the USD in 19-mths and the highest levels against the Euro since the Brexit referendum (June 2016). 

Labour performed terribly and they lost many key seats if there’s and the ‘red wall’ was taken down brick by brick. Corbyn has said he will relinquish his leadership of the Labour Party after a period of reflection. There was a very strong showing from the nationalist parties form other regions of the U.K.  In particular, the SNP had huge wins and they will now be pushing for another Scottish referendum over the next few weeks (with plan to hold it next year). Boris has ruled this out but there will be immense pressure on this and it’s something to bear in mind for the Pound later down the line. Johnson will therefore have his work cut out to strike these new trade deals, keep London as the top financial capital and keep the UK United. 

So, Sterling is in good stead at the moment but will need to break above some key resistance levels if it’s to push on from here in the short-term. Looking further ahead, though, the outlook becomes more complicated. This election result should boost the fundamentals as business confidence and investment are likely to increase, however, the stronger Pound may bring inflation down which may mean the Bank of England stay on hold for longer. Mix that with politics (trade negotiations and risks to union) and forecasting become difficult.

Polls show gap closing on Boris

The Pound has moved off its highs as the latest key opinion poll has shown the Conservative’s lead narrowing.

YouGov’s second MRP survey predicts that the Tories lead has moved down to 28 versus 68 two week ago. So, although it still looks like a healthy lead, the odds of a hung parliament have increased and therefore traders have become more cautious over Sterling.

Pre-election opinion polls have to be taken with a pinch of salt and they often (famously) miss the mark. So, the markets are gearing up for a volatile couple of days as this election is still not a done deal and the result will have such significance moving forward.

A Tory majority is widely expected to boost the Pound as it creates more certainty over Brexit and their policies are more market friendly. A Labour majority is very unlikely but if it occurred the Pound would be expected to tumble because of their perceived less market-friendly policies (e.g. nationalisation, tax/spending/borrowing hikes). A labour-led coalition (with SNP/Lib Dems) is also expected to weaken the Pound in the short-term but not as much as Labour’s policies would be watered down. In this scenario, it’s also likely that the Pound would later rebound as a second Brexit referendum would likely be called.

With voting set to start within less than 24-hrs, the market will take more interest in the real sentiment on ground tomorrow. It’s likely they’ll be some large swings as the exit polls come out and then as the results trickle in overnight (we expect most of the volatility to occur between 1am and 6am Friday). Traders will be particularly focused on some of the key swing seats and whether the Tories can break Labour’s ‘red wall’ (in the north and Midlands). Watch this space.

Pound makes further strides after latest polls

The pound pushed to some fresh highs this morning as opinion polls continue to show a sizable lead for the Tories.

The latest survey from Kantar showed a lead of around 12% points for Boris. This supports the Pound because it creates less uncertainty and a clear path over Brexit, alongside more centre ground market-friendly policies.

As a result, the GBP/USD finally broke above a key technical resistance level and now trades at the highest levels since May. The GBP/EUR has also broken a cent higher from Monday and now trades at the highest levels since May. It’s important to note that it’s not far from some of the highest levels for around 30-months.

We’re now only a week away from the 12th December poll and with the polls starting be more consistent, the market are realigning themselves by buying back into the Pound. Obviously polls can be wrong and there’s still time for things to change but bets are moving this way at the moment.