What happens to the pound after the UK election?
The UK Election on 12 December is one of the most hotly contested in years. Polls continue to show the Conservatives in the lead but uncertainty about the outcome remains, with a corresponding impact on markets, particularly the sterling.
The question we’re asked a lot by clients and other market participants is what will happen to the pound under the various possible outcomes of this election. Broadly speaking, the more certainty there is in terms of next steps by any government with a clear mandate, the more positive this will be for the currency. While uncertainty due to a hung parliament or a government with little ability to manoeuvre will have a negative impact on the currency.
Currently GBP/USD is above 1.31 vs USD & likely to trade within the 1.28/1.33 range prior to the election. Potential investors in the UK are sitting on the sidelines, waiting for a definite political outcome in this election. Once they know where they stand, they can act accordingly.
Scenario 1: What happens to the pound if the Conservatives win?
Currently predicted by the polls, most recently as a 68 seat majority, I expect to see GBP appreciate vs USD, moving to approximately the 1.35 area as investors look to set up in the UK or purchase UK assets.
Scenario 2: What happens to the pound if Labour wins?
The Labour party is currently neutral on Brexit but may call for a second referendum in which Remain will be an option. This is likely to send GBP higher vs USD, around the 1.30 level initially.
Scenario 3: What happens to the pound if there’s a Conservative-led coalition?
A Conservative-led coalition, in which only a few additional seats are needed could lead to a deal with the Brexit Party and/or DUP. On that basis, as with a Conservative majority, GBP is likely to be around the 1.30 area initially.
Scenario 4: What happens to the pound if there’s an Opposition-led coalition?
An opposition-led coalition comprising Labour, SNP and the LibDems would lead to significant pressure for a second referendum and will likely send GBP higher vs USD. A second referendum is likely the most bullish scenario for GBP and with a coalition government the expectation of Article 50 being revoked would be higher. It’s likely GBP may reach 1.40.
Scenario 5: What happens if there’s no single party majority and a hung parliament with no coalition?
This scenario is firmly negative for GBP on significant political uncertainty and it’s likely it would fall vs USD to 1.20.
By Neil Jones,
Head of FX Sales,
Disclaimer: This publication has been prepared by Mizuho Bank, Ltd. (“Mizuho”) and represents the views of the author. It has not been prepared by an independent research department and it has not been prepared in accordance with legal requirements in any country or jurisdiction designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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