City analysts predict what election will mean for sterling, FTSE and Brexit

Theresa May Smiling

When Prime Minister Theresa May surprised Britain by calling a snap General Election from the steps of Downing Street in mid-April, there seemed to be little doubt she would build on her working majority of 17.

However, with Labour’s Jeremy Corbyn making headway in the polls, the result of the vote has seemed increasingly uncertain.

Here, City analysts give their take on what the election could mean for sterling, Brexit and the markets.

Large Tory majority: May and sterling bolstered

If the Conservative party increases its majority, UBS Wealth Management’s Dean Turner expects the pound to resume its previous momentum.

“If our base case emerges and we see a Conservative majority of above 50 seats, we expect sterling volatility to dampen in the short-term,” he said.

However, Kathleen Brooks at City Index, said:

We believe that the market is already positioned for a Tory party majority, hence the relatively muted response in GBP to the sharp narrowing of the opinion polls in recent weeks. Thus, GBP/USD may not get much further above $1.30 even if May wins a decent majority.

Tom Elliott, DeVere Group’s international investment strategist, believes a Tory majority of more than 60 would “vindicate” May’s decision to call an election, and enable her to “effectively ignore the estimated 30 or so Conservative MPs who want as hard a Brexit as possible”.

He added: “On the stock market, FTSE 100 foreign currency earning stocks would weaken as sterling rallies, but UK-focused stocks would rally as prospects for the economy improve.”

Read more: These are five of the strangest 'facts' about the General Election

Slim Tory majority: Hard Brexit, hard time for May

Analysts believe this scenario could increase the chances of a hard or disorderly Brexit.

DeVere Group’s Elliott said:

Anything below 25 and May’s job would be on the line, with a leadership contest beckoning. Sterling would then fall further as the risk of a hard Brexit PM, such as David Davis, is priced in. Capital markets would become very volatile.

Brooks, of City Index, said: “A slim majority of eight seats, as predicted by YouGov, is likely to arouse fears of a hard Brexit, as the 50 or so Eurosceptic MPs in the Conservative party could sway the negotiations. This could spook GBP traders.”

And UBS’ Turner believes: “A less than stellar performance by the Conservatives which resulted in little change to the current parliamentary arithmetic could increase concerns about the possibility of a disorderly Brexit.”

Hung parliament: Pound falls, Brexit complicated

This outcome could see sterling suffer a major hit, according to City Index’s Brooks.

“A hung parliament could be the worst outcome for sterling, as it would create a whole new level of uncertainty,” she said.

In this scenario we would expect a sharp drop in the pound and the FTSE 100. While we would expect the FTSE 100 to recover in the short-term, we could see GBP/USD fall below the 18 April level at $1.25 and back towards $1.20.

Chris Turner, head of FX strategy at ING, said: “Uncertainty is the pound’s well-known Achilles’ heel and in a hung parliament scenario, we think it could fall to $1.24 against the dollar.”

A hung parliament could also be significant for Brexit, which could either soften or slow.

Nomura’s Jordan Rochester said: “GBP would initially suffer from a hung parliament. But, if a Labour coalition were formed, it may be wise not to underestimate the impact of ‘softer Brexit’ hopes.”

Turner of UBS added: “Not only would this make the outlook for domestic policy uncertain but with the Brexit negotiations set to begin less than a fortnight after election day, the government's position here will clearly be under scrutiny. Concerns about the UK and the EU not being able to reach an agreement before 30 March 2019 will no doubt increase.”

Read more: Election Battlegrounds - Five seats beyond London to watch for overnight

Labour win: Sterling spirals, softer Brexit

If Labour turns the tables on the Conservatives and triumphs in the election, Nomura said “higher gilt yields are the obvious conclusion thanks to a combination of a) fiscal easing lifting growth and inflation expectations, b) more substantial levels of issuance, and c) Brexit plans reducing the chances of a hard exit or cliff-edge”.

UBS’ Turner said:

In the face of a Labour-led minority government, we expect uncertainty over government and the outlook for domestic economic policy to weigh on sentiment for the pound.

At the least, it is likely the pound would give up the bulk of its post-election announcement gains.

After this, retreating back to low $1.20 levels versus the USD is a real possibility.

Full story: City analysts predict what election will mean for sterling, FTSE and Brexit: City A.M.

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