Sterling will take a beating if markets have got their bets wrong on the outcome of the UK election, economists have predicted.
The currency desks of Irish banks plan to remain open late into the night in case of an upset that sees Theresa May’s Conservative Party losing its majority in the Commons.
In a briefing called “Mayday for markets?”, economists at Capital Economics in London said that “the biggest casualty should the Conservative Party underperform at the polls and fail to secure a majority would probably be sterling.”
“The currency jumped after the election was called, as the consensus at the time was that a larger Conservative majority would smooth the UK’s exit from the EU. While sterling has held up fairly well against the dollar since then, it has weakened against the euro as the Labour Party’s improved showing in the polls has boosted the chances of a potentially disruptive hung parliament,” the economists said.
The euro traded at 86.9 pence against sterling.
Joshua Mahony, market analyst at online broker IG said that investors had sought out havens in case of a surprise outcome.
“As the week progresses, we continue to see money flood into havens such as gold and the yen, with the Japanese currency representing one of the big winners in the foreign exchange space this week. The uncertainty that has been caused by the recent gains in the polls by Labour shows little signs of going away. However, with the IG digital 100 market showing an 80% expectation of a Conservative majority, it is clear that not everyone believes it is as close as the pollsters would have you believe,” Mr Mahony said.
Sterling could plunge to as low as $1.20 tomorrow, a level last seen in January, should the UK snap election lead to a hung parliament, according to a Bloomberg poll of analysts.
Such an outcome, though seen as unlikely, would be marginally more negative than even an electoral upset that sees the Labour Party defying odds to emerge the winner, according to the survey of 11 banks and brokerages.
A victory for Ms May’s Conservative Party would be supportive of the pound, and this outcome is more or less already priced in, the analysts say.
Analysts also highlighted that the shorter, and longer-term, effects on the currency could be different.
While a strong Tory win lends markets near-term certainty and helps sterling, over a longer period it could “increase the odds of a harder Brexit, which would probably be consistent with the pound being lower,” Andrew Sheets, chief cross-asset strategist, has said.
An outcome of a large majority for the Conservatives seems already priced in, and there’s limited scope for sterling to rally on the news, according to the survey.
Still, this outcome is seen as the most positive for the pound immediately after the vote.
“In the markets, there is a very simple rule of thumb: The larger the Conservative majority becomes, the more positive it is for sterling,” said Adam Cole, London-based head of global foreign-exchange strategy at RBC.
A small majority for the Tories, which was once seen as a tail risk, is now very much on the market’s radar as Labour is slowly chipping away at the Tory lead in polls, according to the Blomberg survey.
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