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Pound Sterling Extends Losses as Johnson Makes Fresh Bid for an Election

NUmber 10

Image © Gov.uk

- Parliament to vote on snap election Monday

- General Election invites more uncertainty to be priced into Sterling

- Pound-to-Euro exchange rate today: 1.1567, down 0.33%

- Pound-to-Dollar exchange rate today: 1.2835, down 0.65%

The British Pound fell further from recent multi-month highs Thursday after Prime Minister Boris Johnson said he would ask Parliament to vote for a snap General Election on Monday.

The vote would be held on December 12 and will introduce fresh uncertainty into Sterling's outlook.

An election is seen by the Government as the only way of breaking the Parliamentary deadlock which has this week seen the passage of Brexit legislation stalled in the House of Commons after MPs voted down the Government's timetable to deliver Brexit by the October 31 deadline.

Leader of the House Jacob Rees-Mogg confirmed in Parliament that Monday's vote will be held under the terms of the Fixed Term Parliament Act which stipulates that for Parliament to be dissolved and an election called a two-thirds majority must be achieved.

Johnson wrote to leader of the opposition Jeremy Corbyn earlier today saying he would hand parliament more time to approve his Brexit deal but that lawmakers must back a December election. "This parliament has refused to take decisions. It cannot refuse to let the voters replace it with a new parliament that can make decisions," he said to Corbyn.

"It’s now all about how Jeremy Corbyn will respond. Given it will be a vote on Monday under FTPA it will require a 2/3rds of the House (434MPs) and therefore Corbyn's response the key as it won’t pass unless he agrees," says Jordan Rochester, a currency strategist with Nomura.

Johnson earlier in the day held a 'political Cabinet' meeting at 10 Downing Street, where the Government's strategy on delivering Brexit and the question of holding a snap General Election were debated.

The decision to call for an election suggests Johnson is expecting the European Union to imminently grant a Brexit extension to January 31.

A "healthy reminder," says Rochester, "Corbyn can still argue against an election until “a Hard Brexit is off the table” and point out Boris may choose an election date that could risk that… so we continue as we were."

Mounting speculation for a snap General Election has been growing for days now, but Sterling took a turn lower when various media sources warned a decision on the matter was imminent.

If we look at Pound Sterling Live's comparison chart we can see the currency is the worst-performing major currency of the G10:

Pound's performance

The reasons Sterling does not appreciate the prospect of a General Election is because it opens the door to further uncertainty as the political deck is reshuffled once more.

The outcome will have significant implications for domestic economic policy, but more importantly the clarity on Brexit direction is once again muddied.

According to research from Pantheon Macroeconomics, the Conservatives are expected to bleed support to the Brexit party once the October 31 deadline has been missed, while Labour should rally when people currently saying they don’t know how they will vote make up their minds; most of them voted Labour in 2017.

"Our base case remains that the election leads to another hung parliament, with a Tory minority government still paralysed on Brexit and forced into further delays," says Samuel Tombs, UK Economist with Pantheon Macroeconomics, adding:

"We expect an imminent General Election, which will bring more near-term uncertainty and depress Sterling.

CEO of deVere Group, Nigel Green, says "the electorate is extremely volatile and there’s never been a more uncertain general election. Small shifts will move the needle considerably.”

“With an uncertain UK general election inevitably on the way, if you're serious about protecting your money and assets you need to take action now," says Green.

According to Green, there are two key reasons why a General Election poses a risk to UK assets:

“First, Labour leader and leftist firebrand Jeremy Corbyn might become the UK’s next Prime Minister.

“His anti-business, low-profit, high-tax policies - including a possible wealth tax - can be expected to spook the financial markets, damage long-term sustainable growth of the British economy, put more pressure on UK financial assets, and lead to a significant sell-off of the pound.

“Second, the election could result in a hung parliament, meaning more of the same indefinite uncertainty, deliberation and chaos. Boris Johnson might be returned as PM but without a majority.

“The Brexit Party could eat into the Conservative vote as they will claim Mr Johnson did not deliver Brexit by October 31- something on which he staked his whole premiership."

However, opinion amongst the analyst community is split on the matter.

Neil Jones, Head of FX Sales, Financial Institutions, at Mizuho Bank in London says he sees an election coming, and that under a worst case scenario a Brexit extension lasts up to January 31. However, the outcome of the election is expected to "generate Sterling demand," says Jones, and this "all favours higher, longer-term Sterling into 2020."

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