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Labour to Back an Election, Currency Markets to Treat Sterling with Caution over Coming Weeks

Corbyn

Above: Labour Party leader Jeremy Corbyn will back an election. File image © Pound Sterling Live, BBC News

- Pound-to-Euro exchange rate: 1.1587

- Pound-to-Dollar exchange rate: 1.2849

- Labour to back General Election today

- Brexit put on ice until December

- Expect Sterling to trade with negative bias

The British Pound remains well supported on global foreign exchange markets, treading water close to its multi-month highs against the Euro, Dollar and other major currencies.

However, the strong upside momentum seen earlier in October has certainly faded, with traders and investors eyeing a General Election campaign in the lead up to Christmas as being a reason to remain cautious on the UK currency.

The Government has indicated it will commit Tuesday's Parliamentary business to securing an election on December 12, and all indications suggest they might now succeed as Labour have indicated they will back a vote.

Labour leader Jeremy Corbyn has confirmed that all the pre-conditions for backing a snap election have been met, specifically that a 'no deal' Brexit has been taken off the table.

"I have consistently said that we are ready for an election and our support is subject to a no deal Brexit being off the table," Corbyn told his shadow cabinet, according to Reuters. "We have now heard from the EU that the extension of Article 50 to 31st January has been confirmed, so for the next three months, our condition of taking no deal off the table has now been met. We will now launch the most ambitious and radical campaign for real change our country has ever seen."

The SNP and Liberal Democrats had earlier indicated they could join the Conservatives and back the Government's fresh attempt to secure a vote, provided the Government does not try to put its Brexit legislation before Parliament once more.

With the SNP and Lib Dems moving towards backing a vote Labour will have been acutely aware ongoing resistance to an election would not translate well with the electorate.

"GBP remains in somewhat of a holding pattern, ahead of yet another important parliamentary session today, when UK PM Johnson will propose a bill to amend the next general election date to Dec. 12. The desk has a mild bias to buy on dips into the support. The window for calendar-related flows to impact price action is narrowing, so look to stay flexible. There is technical resistance initially into 1.2865/80. To the downside, there is minor support into 1.2800, followed by 1.2750," says Michael Nair, FX spot trader at UBS.

Helping push the opposition parties, particularly the Lib Dems and SNP, towards backing an election will have been the concession by Government they would not try and pass Brexit legislation ahead of a vote.

It had been confirmed overnight by the Leader of the House, Jacob Rees-Mogg, that the Government will in fact pull the Withdrawal Agreement Bill from Parliamentary business in order to secure the support of opposition parties.

The route to SNP and Liberal Democrat backing for an election had therefore been opened.

From a currency market perspective these are significant developments in that it appears there will now be no Brexit developments worth considering until the results of an election are known in December.

Therefore, the British Pound is likely to start focussing on other factors over the near-term which suggests to us Brexit-inspired volatility in the currency is likely to fade.

Pound enters a phase of consolidation

Above: GBP/EUR consolidates above 1.1550.

It must however be noted that the British Pound has historically tended to underperform in the run up to elections, and there would be little reason to doubt this would be the case this time around in 2019. "We see prospects of an early election as negative for GBP given that it would tame optimism about the withdrawal agreement being reached – the key driver of GBP gains this month – and reintroduce uncertainty into Sterling," says Petr Krpata, a foreign exchange strategist at ING.

So while Brexit will fade as a driver, the Pound could start becoming responsive to shifts in polling data, which could keep investors nervous.

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A Simple Majority

Tuesday's attempts to win Parliament's blessing for an election comes after the Government failed on Monday to secure the two-thirds majority required under the Fixed Term Parliament Act to trigger an election. However, the Government is proposing a bill today would amend the act with a simple majority.

299 MPs voted for an election last night, meaning the Government was 135 votes short of the threshold required by the act, but it was only 21 short of a simple majority.

The new bill will be introduced and submitted for approval at second reading today in a fast-track timetable. The law requires 25 working days between the dissolution of parliament and the election date.

"Such a bill would require only a simple majority, but is more complicated as it could be subject to amendments. To secure the required support from the Liberal Democrats and SNP for that simple majority, the government has promised to shelve the Brexit bill until after the election. Voting may not begin until late afternoon at the earliest," says Hann-Ju Ho, an economist with Lloyds Bank.

However, as always with this Parliament, nothing is certain as the Liberal Democrats have indicated they would prefer an election on the 9th of December, not Johnson's proposal for the 12th.

Apparently, holding the vote on the 12th would disenfranchise students because it was too close to the end of term, which for most universities is December 13.

The Pound shows it dislikes uncertainty, and General Elections pose significant amounts of uncertainty. Hence, we don't see the Pound enduring any sustainable rallies over the foreseeable future and expect any strength to be sold into.

While the case for further strenght in the Pound is expected to fade over coming weeks, the biggest shift in the market's approach to the Pound is the belief that the weakness we saw back in July is now behind it.

Recall the Pound was seen plumbing near multi-year lows against the Euro and U.S. Dollar after Boris Johnson took over the helm of the Conservative Party and raised the prospect of a 'no deal' Brexit on October 31.

Johnson's success in securing a Brexit deal does however appear to be a game changer for the Pound in that the the Conservatives - who are faouvrites to win the election - will campaign on delivering their deal.

"We expect an election to lead us to the Brexit end game. If PM Johnsons wins, he can implement his Brexit deal without too many problems. If the opposition wins, it would most likely call a second EU referendum," says Mikael Olai Milhøj, Senior Analyst at Danske Bank. "It is difficult to see a path to a no-deal outcome anymore, which also explains why a lot of negativity has been priced out of the GBP."

If we look at the polling, the Conservatives are likely to come away with a majority. The current level of Sterling is therefore consistent with current polling levels, therefore changes in polling might start to have an impact on the Pound should it switch focus away from Brexit and onto the election, which we belive it will do.

Poll of polls

Image courtesy of POLITICO

We saw in the 2017 vote that a sudden shift in polling during the election campaign can happen, and we expect the market will react in negative fashion to a fall in support for the Conservatives as this would muddy the waters with regards to the political outlook.

A hung parliament would create a cocktail of uncertainty.

"If Boris is able to secure early elections, the kneejerk reaction in the GBP would also probably be lower, but a Conservative majority and the prospect of the Withdrawal Agreement finally getting through the House should eventually push the GBP back up again," says Stephen Gallo, an analyst at BMO Capital Markets.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of a specialist foreign exchange specialist. A payments provider can deliver you an exchange rate closer to the real market rate than your bank would, thereby saving you substantial quantities of currency. Find out more here.

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