The pound’s rally on bets for a win by the ruling Conservative party in this week’s UK election leaves it looking vulnerable to the actual result.
It wouldn’t take much of a swing by undecided voters today to turn a strong Conservative majority into a weak one, with a lot of areas set to come down to narrow margins.
The risk is real, as demonstrated by a YouGov poll on Tuesday that successfully predicted the 2017 vote. Sterling slipped from an eight-month high after the poll suggested Boris Johnson’s party will win by a smaller majority than previously forecast, trimming the currency’s world-beating advance in recent months.
Options show increased demand to hedge an unexpected election outcome, with bets on the pound weakening at the highest since the aftermath of the June 2016 Brexit referendum.
“Broadly speaking, we believe that markets have gone a bit far ahead of themselves in pricing a robust Tory majority,” said Mark Dowding, chief investment officer at BlueBay Asset Management, which closed a long position in the pound against the euro this week. “This election remains pretty unpredictable and although a majority for Johnson seems the most likely outcome, we don’t think we can rule out surprises on Thursday evening.”
The pound has been the market barometer of political risk since the June 2016 Brexit vote. After touching an almost three-year low in early September, it has recovered on expectations that Johnson’s gamble to call a snap poll could pay off by getting his deal to leave the European Union through Parliament.
Polls have consistently suggested the Conservatives are on track for a win, yet the latest YouGov survey forecast a majority of 28 seats, down from a bigger majority of 68 predicted in its poll two weeks ago. Toronto-Dominion Bank assigns a 55% probability to a large victory for the ruling party, but sees this base case as priced in by markets.
“Confirmation of a solid Tory majority may see a knee-jerk move higher in cable, but is vulnerable to ‘sell the fact’ profit taking and a shakeout of stale positions once the elections result is known,” wrote Ned Rumpeltin, the bank’s European head of currency strategy, in a note referring to the pound-dollar currency pair.
The pound traded 0.1% weaker at $1.3150 in London, after falling as much as 0.4% following the YouGov poll. The median forecast in Bloomberg currency surveys is for a climb to $1.35 by the end of 2020, but predictions wildly diverge depending on how analysts see the election result and what that means for the Brexit process.
For strategists already betting on a Tory victory, it now comes down to how many seats they can gain: the bigger the majority, the less likelihood Parliament is once again trapped in a stalemate and unable to pass legislation.
The pound’s rally on bets for a win by the ruling Conservative party in this week’s UK election leaves it looking vulnerable to the actual result
