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Greetings, forex chaps! Brexit-related news took a back seat during the past few weeks. However, Brexit got pushed to the front once more after U.K. Prime Minister Theresa May called for a snap election yesterday. What’s that all about? And why did the pound skyrocket as a result? Well, read on and find out.

GBP/USD: 15-Minute Forex Chart
GBP/USD: 15-Minute Forex Chart

Why did Theresa May call for a snap election?

In her announcement, Theresa May explained that “the Government has the right plan for negotiating our new relationship with Europe.” However, the opposition parties are trying their best to jeopardize the government’s efforts and force the government “to change course.”

May then elaborated what the opposition parties have been doing as follows:

“In recent weeks Labour has threatened to vote against the final agreement we reach with the European Union. The Liberal Democrats have said they want to grind the business of government to a standstill.”

“The Scottish National Party say they will vote against the legislation that formally repeals Britain’s membership of the European Union. And unelected members of the House of Lords have vowed to fight us every step of the way.”

According to May, this “political game-playing” by the opposition divides Westminster. And in doing so, it risks the government’s ability “to make a success of Brexit and it will cause damaging uncertainty and instability to the country.”

May therefore believes that calling for a general election, and hoping that the people would vote overwhelmingly in favor of the Conservative Party, would strengthen the government’s ability to negotiate a good and proper Brexit, as well as “remove the risk of uncertainty and instability and continue to give the country the strong and stable leadership it demands.”

What about the Fixed-Term Parliaments Act of 2011?

For those who don’t know, the U.K. has the Fixed-Term Parliaments Act of 2011, which basically mandates that general elections can only be held during “the first Thursday in May” every five years. `And since the last general election was held in 2015, that means that another general election is not due until 2020.

However, there are two ways to get around that limitation. The first is to call on two-thirds of MPs to support an early election, which is what Theresa May did yesterday. And the second, which May can use if she can’t muster two-thirds of MPs, is to call for a vote of no confidence in her own government. And such a move only requires a simple majority (50% + 1 MP).

Will MPs vote in favor of early elections?

This question may already be moot, depending on when you read this write-up. But it is almost certain that MPs will vote in favor of early elections. After all, Labour Party Leader Jeremy Corbyn already stated the following in the wake of May’s call:

“I welcome the Prime Minister’s decision to give the British people the chance to vote for a government that will put the interests of the majority first.”

“Labour will be offering the country an effective alternative to a government that has failed to rebuild the economy, delivered falling living standards and damaging cuts to our schools and NHS.”

“In the last couple of weeks, Labour has set out policies that offer a clear and credible choice for the country. We look forward to showing how Labour will stand up for the people of Britain”

And in the unlikely scenario that MPs refuse to back an early election, Theresa May still has the option to call for a vote of no confidence.

So, when is the general election gonna be held?

According to Theresa May’s statement and if things go smoothly, “the government should call a general election, to be held on 8 June.”

Will May’s Conservative Party win more seats?

The Conservative Party currently controls 330 of 650 seats while Labour has 229 and the Scottish National Party has 54. The other parties combined hold 36 seats, with one vacant seat.

This gives the ruling Conservative Party a slim majority. And the Conservative Party secured those seats by winning 36.9% of the votes.

But based on the latest polls, Theresa May’s Conservative Party has a rather large lead versus its closest rival, the Labour Party.

ICM Unlimited: conducted on April 18

  • Conservative: 46%
  • Labour: 25%

YouGov: conducted between April 12 and 13

  • Conservative: 44%
  • Labour: 23%

ComRes Global: conducted between April 11 and 13

  • Conservative: 46%
  • Labour: 25%

Opinium: conducted on April 11

  • Conservative: 38%
  • Labour: 29%

There are a couple caveats here, though. The first is that the polls have lately become notorious for failing to predict the actual outcome. In the 2015 U.K. general election, for example, most polls got it wrong. And the same thing happened again during the Brexit referendum. It’s therefore only natural and healthy to view the polls with some skepticism.

The other caveat is that the U.K.’s “first-past-the-post” voting system means that voting intentions (and actual votes for that matter) don’t automatically mean more seats in Parliament.

The blatant example of this is how the UK Independence Party (UKIP) got around 12.6% of the total vote during the 2015 general elections, which is about 2.3 million more votes than the SNP, but UKIP only ends up with one seat while the SNP gets to enjoy 54 seats.

In short, Theresa May’s Conservative Party will likely get more seats, but that’s not a guaranteed outcome.

Final Thoughts

The pound initially dropped when Theresa May said that she had an announcement to make and rumors began to spread that May will likely be calling for early elections.

And when the rumors were confirmed to be true by May’s call for a snap election, the pound initially got a soft lift, very likely from profit-taking. However, pound bulls later came in force, and that was very likely because of the realization that more seats for the Conservative Party means less interference from the opposition parties, which means less uncertainty during the critical Brexit negotiation process, as well as when it comes to ratifying the final Brexit deal.

And it’s also likely that market players were betting that Theresa May’s Conservative Party would be able to secure more seats, given the Party’s rather wide lead in the polls. Although there are a couple of caveats to that, as mentioned earlier.

And aside from the stated objectives of securing more seats and reinforcing the government’s negotiating position, a snap election would also provide a few uncertainty-reducing benefits, which includes removing the stigma of being an unelected PM and a mere substitute for Cameron, as well as affirming the people’s faith in Theresa May and confirming her own right as a PM.

The snap election and a majority vote in favor of the Conservatives would also be seen as a mandate from the people to push on with Brexit, which would hopefully lead to fewer complaints and interference from the remaining Bremainers who continue to resist.

Overall, May’s call for a snap election, which would normally be a source of uncertainty, is actually a means to potentially reduce uncertainty. And that’s what the apparently optimistic market jumped on, given the Conservative’s lead in the polls, and notwithstanding the recent track record of the polls.