Greetings, forex chaps! The U.K. will vote on how their future will be shaped tomorrow. And while all elections are important, tomorrow’s general elections in the U.K. is extra special because the vote is heavily linked to Brexit. And if you’re planning to trade tomorrow’s top-tier event, then you better read up on today’s write-up.
How did the pound react previously?
Prior to the May 2015 general elections, most polls were forecasting that the race would be a very tight one, with some polls even forecasting that the Conservative Party and the Labour Party would be in a dead heat. Also, practically all polls were hinting that the Conservative Party will very likely not be able to secure a working majority in Parliament.
Market players (and the pollsters themselves) were therefore rather surprised when exit polls and actual voting results came in and revealed that 36.9% of Britons voted for the Conservative Party while 30.4% voted for Labour. That’s almost a 7% lead – an outcome that no pollster was able to predict.
And that would ultimately translate to the Conservative Party capturing 330 seats in Parliament (up from 306), which is another outcome that no pollster was able to predict. And these surprising results triggered a flurry of relief buying that sent the pound higher against all its peers.
Where do the polls stand now?
Below are the major pollsters and their latest survey results. And as you can see, most of them are giving the Conservatives a single digit lead, with the exception of ICM and ComRes.
Survey Monkey: conducted on June 6
Conservatives lead by 4%
Opinium: conducted between June 4-6
Conservatives lead by 7%
ICM Unlimited: conducted between June 2-4
Conservatives lead by 11%
Survation: conducted on June 3
Conservatives lead by 1%
YouGov: conducted between April 12 and 13
Conservatives lead by 4%
ComRes Global: conducted between May 31 and June 1
Conservatives lead by 12%
Norstat: conducted between May 31 and June 1
Conservatives lead by 4%
ORB: conducted between May 31 and June 1
Conservatives lead by 9%
Ipsos Mori: conducted between May 30 and June 1
Conservatives lead by 5%
Panel Base: conducted between May 26 and June 1
Conservatives lead by 8%
And to put these into their proper context, many pollsters were giving the Conservatives a 20+ lead when Theresa May called for early elections back in April, which caused the pound to jump higher back then since a sweeping victory for the Conservative Party would not only provide more stability, but would also strengthen the U.K. government’s ability to negotiate a proper Brexit.
It’s therefore quite natural for the market to feel jittery (and for the pound to wobble lower) as the Conservative Party’s lead slowly dwindled, although the May 11 BOE statement also apparently helped to push the pound lower with the revelation that the BOE’s projections “continue to be conditioned on the average of a range of possible outcomes for those arrangements and, as before, the assumption that the adjustment to the United Kingdom’s new relationship with the European Union is smooth,” and that the BOE hasn’t made any contingency plans for a tough Brexit.
So, what can we expect tomorrow?
Exit polls are expected to start trickling out around 10pm BST (9pm GMT), which is during the late U.S. session, so we’ll be getting a first glimpse of how voters actually voted by then. The pound will probably not react much at first, but the action will likely start to ramp up during the Asian session when the exit polls begin to give a clearer picture.
If the Conservative Party leads by a lot, then the pound will probably get bid higher as a knee-jerk reaction, but if Labour leads, then the pound will likely drop further because Labour’s manifesto reveals that it plans to raise corporate taxes, as well as taxes on higher-earning individuals, and nationalize some industries to boot, so investors aren’t particularly fond of the Labour Party.
After the initial knee-jerk reaction, a shock Labour victory will probably send the pound even lower. But if the Conservative Party wins, then it becomes a bit tricky because the market will likely be waiting for the number of seats won in Parliament.
If the Conservative Party fails to gain a working majority by capturing at least 326 of 650 seats, then that will likely be viewed as a bad for the pound. If the Conservatives somehow capture at least 2/3 or 430 seats, then that will very likely be good for the pound since seats above that would mean little to no resistance against the Conservatives and Theresa May’s plans on Brexit in particular.
As to how the pound will likely react if the number of seats captured are between 326 and 430, there’s really no consensus on that, although a relief rally on the fact that the Conservatives were able to capture a working majority is a highly probable scenario, with more seats won being more likely to entice more pound demand.
In any case, an interesting time indeed. And just remember that there’s no shame in staying in the sidelines if you don’t want the extra volatility or if you think you can’t handle the extra volatility.