LONDON — With the general election now less than two weeks away, currency traders are getting jumpy, especially after two polls overnight on Friday showed a significant narrowing of the Conservative Party’s prospective share of the vote.
Opinions on where the pound will head in the coming months differ wildly among forecasters, with a range of between 1.20 on the dollar to $US1.45 from major forecasters over the course of the next 18 months.
Sterling has rallied since the election was called, passing above 1.30 on the dollar for the first time since September 2016 in recent weeks. That has been based largely on the assumption that May’s Conservative Party will win an increased majority at June’s election, paving the way for her to take a more conciliatory stance on Brexit, and move away from the sort of Brexit favoured by hardline Conservative MPs, who currently have a disproportionate influence on policy thanks to the party’s slim majority.
Regardless of the overnight polls — which have pushed the pound down close to 0.5% — most forecasters are still expecting a Conservative majority come the morning of June 9, so focus is on the so-called “second stage” of the election.
That’s according to ING FX Strategist Viraj Patel, who writes in a note circulated on Thursday that “the emphasis is on the second stage; both a cabinet reshuffle (likely within a few days of the election result) and the UK’s stance on a Brexit transition deal will give GBP markets greater directional steer.”
“The bottom line is that GBP risks from the General Election look asymmetrically skewed to the downside — there is now more to lose than gain.”
To help steer through those issues, Patel and his colleagues at the Dutch lender have compiled a chart exploring what potential reshuffles and the negotiation of a transition deal could mean for sterling. Check it out below:
(Note that Patel’s analysis was compiled prior to the most recent polls, so does not reflect all of the swing to the Labour Party in those polls)