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.