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What to expect from GBP on the results of the UK General Election


On Thursday 12th December, the UK (finally) goes to the polls for its General Election. The Conservatives are looking for a majority in order to push ahead with its Brexit agenda. Whereas a so-called “progressive alliance” of opposition parties are looking for enough seats to kick Prime Minister Johnson out of Downing Street and out the UK on an alternative path that would culminate in a second referendum. What are we expecting as a result of the election and could be the impact?

UK flag and Houses of Parliament

 

Into the final days of campaigning, the Conservatives have an average lead of around 9% to 10%.

 

Due to the electoral system of First Past The Post, it is broadly considered that the Conservatives would need a lead of around 5% to 6% to generate a majority of seats. Below is a chart taken from polling data back in September but which still illustrates this point.

 

The average polling error of elections in the past tends to be around 4%. Historically, this has tended to favour the Conservatives, however, this is no ordinary election. According to the Electoral Reform Society, a record 30% of people could be ready to vote tactically. This suggests that polling could have a wide margin of error. If this average polling error is correct then the Conservatives should not take their lead for granted. However, an error the size of which to push PM Johnson out of Downing Street looks unlikely.

 

If that is the case then the result should not be taken as a foregone conclusion. One week GBP/USD options implied volatility has spiked higher in front of the election. Aside from the options volatility as sterling rallied sharply on the back of Boris Johnson achieving his Withdrawal Agreement deal from the EU, this is the highest volatility since the Brexit Referendum back in 2016.

 

The bears have been busy covering their short positions on Sterling futures positions since Bosir Johnson became Prime Minister back in the late summer. There is still a sizable short position to cover (currently net -30,050 contracts). If there is a Conservative majority then we expect further short covering, enough to drive GBP/USD towards $1.3500 area into Q1 2020.

 

Trading sterling overnight Thursday into Friday

The polling booths close at 2200GMT on Thursday evening. At that exact moment, the first Exit Poll is released. This will give a strong indication of the winner. The actual results of various seats begin to drip through in the small hours of Friday. In the June 2017 General Election, the first confirmed result of a constituency was at 2253GMT (just 53 minutes after the polls had closed). The Press Association suggests that between 0100GMT and 0200GMT on Friday we could begin to get an idea of how the results are faring. Between 0200GMT and 0300GMT we will begin to see well over a hundred constituencies having declared their results. This could be the time where we begin to see decisive direction from Cable.

 

Our assessment

Sterling traders have seen the polls not narrowing in the final days and have begun to price in a Conservative majority. If this is proved to be correct, this could restrict the immediate upside move from GBP/USD in the early hours of Friday morning.

  • A large Conservative majority (more than 40/50 seats) – this would be GBP positive and should drive GBP/USD towards $1.3500 in the coming weeks.
  • A small Conservative majority (10/20 seats) – Much of this move would probably have been priced in already. The risk would be that profit could be taken on a volatile market. We could see a move back towards $1.3000 on this, although would likely prove to be a buying opportunity for Q1 2020.
  • No/negligible Conservative majority – This would make a very difficult to get anything done as the Conservative backbenchers would again be holding PM Johnson’s feet to the fire. GBP/USD towards $1.2800/$.3000.
  • Hung Parliament – massive uncertainty again, the identity of the next Government is completely up in the air and could be a Labour minority government. GBP/USD would retrace towards $1.2500/$1.2600.

 


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.