As the UK electorate goes to the polls tomorrow, markets have begun to consolidate. However this consolidation is ahead of a likely ramp up in volatility tomorrow. The fun will kick off at 2200BST when the exit poll will be released. Cue a surge in volatility on sterling as traders factor in the implications for the currency. The volatility will continue throughout the night as various bellwether constituencies are announced. There is likely to be further volatility throughout Friday too. What are the key scenarios that could affect GBP/USD from the UK General Election?
First thing to say is that the exit poll is by no means a certainty. In 2015 the Conservatives were deemed to have won 316 seats leaving them the largest party in a hung parliament. However they eventually won more seats, 330 which took them over the 326 seats needed to form a majority, winning them the election outright.
In 2017, markets seem to be fairly settled in an increased Tory majority, however the way the opinion polls have tightened over recent weeks would suggest that there is a prospect that the Tory majority may not be as significant as it once was. The way that sterling has settled recently, anything lower than maybe a 30/50 seat majority may well be seen as a marginal failure , but the closer we get to a hung parliament the worse sterling will perform. Unable to decisively increase the majority against the perception of a calamitous Labour opposition will be deemed as Theresa May failing. The increasingly tight nature of the polls and the loss of momentum in the sterling rally against the dollar would suggest that this is the most likely scenario.
GBP/USD is currently consolidating around $1.2900. The scenarios are based on four scenarios that could arise: a strong Tory majority, a small/mild increase in Tory majority, a Hung Parliament, a Labour victory.
- A strong Tory majority would be the only scenario that would certainly drive Cable higher decisively above $1.3000 and perhaps towards pushing $1.3500 in the coming weeks (before the Brexit talks begin).
- A Tory majority of between 20 and 50 seats. This is the most likely scenario given the dreadful Conservative campaign. It would drive intraday volatility but Cable is likely to range between $1.2600/$1.2800
- A reduced Tory majority or Hung Parliament would be sterling negative with a likely 2% to 4% sell-off on sterling, which would mean GBP/USD back towards $1.2400/$1.2600.
- A Labour victory would be most damaging for sterling. It would drive sterling lower by at least 5%. This is though the highly unlikely scenario, but tht by its nature could create huge volatility.