Updated 16:25 GMT: A sell-off on the Pound gained momentum this afternoon, as investors have engaged in a bout of profit taking.
At the time of writing GBP/EUR has fallen to €1.1985, around half a cent down from the day’s best levels, while GBP/USD has tumbled over 1% to $1.3321.
However analysts suggest Sterling may have room to rally again before the end of 2019 as Boris Johnson seeks to pass his Brexit deal by Christmas.
— ITV News (@itvnews) December 13, 2019
Updated 09:21 GMT: UK traders have woken up to a sea of blue this morning after the Conservatives pulled off a ‘historic’ election victory.
The result lit a fire under the Pound, which soared overnight as the exit poll predicted the Tories would secure more seats than even the parties most optimistic members had predicted.
— BBC Election (@bbcelection) December 13, 2019
This catapulted GBP/EUR above €1.20 and saw GBP/USD briefly capture $1.35, driven by the expectation that a sizable majority will help to expedite the passing of Boris Johnson’s Brexit deal and remove the risk of the UK crashing out of the EU next month.
However there are signs that GBP investors may have been a little overzealous, with the Pound walking back some of its gains at the start of the European session.
Pre-Election Anxiety Sends the Pound (GBP) Lower
UK voters are bracing the winter weather today to cast their votes in what is being billed as the most important general election of a generation.
UK votes in third general election in four years — latest https://t.co/iF04gVnoLH
— FT UK Politics (@ftukpolitics) December 12, 2019
At the same time, the Pound has succumbed to some last minute election jitters, slipping against the majority of its peers amid lingering doubts it could result in a hung parliament.
However any substantial movement in Sterling will be reserved until after 22:00 GMT when voting closes and the exit poll is published.
How the UK Election Campaign has Shaped Sterling
Since the election was called on 29th October the Pound (GBP) has been characterised by its strength.
This has been mostly spurred by speculation that the Conservatives will secure a majority in the election. GBP investors hope this will allow Boris Johnson to push his EU withdrawal deal through parliament and provide greater clarity on Brexit.
Some of the key moments in the campaign include:
- The Brexit party announces its decision to stand down its candidates in Conservative held constituencies. GBP exchange rates jump over 1%.
- YouGov’s first multilevel regression with post-stratification (MRP) poll predicts the Tories are on track to win a 68 seat majority. GBP exchange rates surges around 2% in the days that follow.
- The final MRP poll suggests the Tory majority has narrowed to 28. The risk of a hung parliament sees the Pound shed nearly 1%.
|GBP Pairing||Exchange Rate on 31/10/19||Exchange Rate on 12/12/19|
Possible Outcomes and their Impact on GBP Exchange Rates
While UK politics has grown increasingly unpredictable in recent years, the general consensus is that there are two viable outcomes for the 2019 general election.
The most widely expected outcome is that the Conservatives will secure a majority. Markets have largely already priced in a win for the Tories however, so any immediate upside in the Pound is likely to prove limited.
The other possibility is that the election will result in a hung parliament. This could see GBP exchange rates move sharply lower on Friday as the threat of prolonged political and Brexit uncertainty likely takes a heavy toll on Sterling sentiment.
— ING Economics (@ING_Economics) December 12, 2019
What the Analysts are Saying
Adam Solomon, Head of Trading at TorFX, suggests the Pound has little room to move higher:
If the Tories do win a majority on Thursday, it won’t be a surprise to anyone. To that end, it would be reasonable to expect a fairly muted reaction in the market. A Tory majority is already priced into the current market rates. The risk, then, is what will happen in the event of a hung parliament.
Gearoid Keegan, Senior Treasury dealer at Investec warns a hung parliament remains a clear risk to Sterling:
‘The polling over the last two days has showed that a Conservative majority might not be as sure a thing. Boris Johnson is still on track for a majority. If he gets a 40-50 seat majority, that would be sterling positive.
‘Any other outcome, a narrow majority or even a hung parliament – which would be disastrous – would be Sterling negative.’