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Election Called: "Pound Sterling Continues to be Extraordinarily Confused", Volatility vs. Euro and Dollar Dies

Downing Street

Image © Gov.uk

- Pound-to-Euro exchange rate: 1.1582

- Pound-to-Dollar exchange rate: 1.2868

- Sterling to remain hobbled by uncertainty

- Markets to remain nervous ahead of Dec. 12 vote

- Another hung parliament likely

The British Pound continues churning ground around its recent highs against the Euro, Dollar and other major currencies, with market focus likely to turn squarely towards the outcome of the looming December 12 election.

Tuesday saw lawmakers in the House of Commons vote 438-20 in favour of holding a General Election on December 12, the first December vote in nearly a century. The legislation will now be passed to the House of Lords for consideration, but is expected to ultimately be rubber-stamped owing to the overwhelming majority delivered by the Commons.

The December 12 date represents something of a win for the Government as this was their preferred date, with other dates of the 9th, 10th, and yes - the 11th - all being contested.

The opposition claimed that students would be disenfranchised by a December 12 vote, something the Government claimed to be a "complete red herring". Extraordinary attempts by opposition MPs to alter the election legislation by changing the voting age and giving the vote to EU citizens, were rejected. Understandably, such changes were deemed to be out of scope with legislation intended to simply call an election.

Parliament will likely be dissolved one week from today.

For Sterling, the door to a period of fresh political uncertainty is now open: on the one hand a 'no deal' Brexit has been averted and this is likely to remain the case as the Conservative Party will be running on a ticket to deliver a deal. On the other hand, the prospect of a hung Parliament, or a Jeremy Corbyn-lead Government gives reason for market nervousness.

These factors, pulling in opposite directions, have understandably left Sterling looking something akin to a rabbit caught in headlights.

"The British people, the domestic economy and the UK pound desperately need clarity. A general election is therefore the only appropriate way to achieve this. Against the backdrop of completely unpredictable, imminent parliamentary developments, the Pound Sterling continues to be extraordinarily confused," says Marc-André Fongern at MAF Global Forex.

However, Fongern says the currency "tends to break out upwards rather than downwards. Based on recent events, the GBP's path may become less arduous, even if the election campaigns of the respective parties are likely to cause considerable volatility."

“For markets, what matters is more time will pass before the latest version of the Brexit deal can go through the parliamentary process. From a macro stand point, a snap election means more time will pass before the UK can focus on economic matters and implement expansionary measures. Credit impulse would slow UK growth down through to the end of Q1 2020. No doubt this would weigh on GBP mid-term as would the risk implied by a general election," says Olivier Konzeoue, FX Sales Trader at Saxo Markets.

Polling currently favours the Conservative Party of Boris Johnson, however the first-past-the-post electoral system suggests they will have to command a sizeable lead over their nearest rivals if they are to walk away with a majority.

Poll of Polls

What is telling is that bookmakers Betfair were offering odds of 10/11 for a Conservative majority and 11/10 for a hung parliament. The UK's most renowned pollster John Curtice said that if he were to stick his neck out and hazard a guess on the outcome, it would be a hung Parliament.

Such an outcome would mean the Brexit question is by no means settled, and we would expect a Parliamentary scuffle to prevent the Brexit deal being passed, meaning further Brexit delay and uncertainty.

This will ensure the cold winter for investment in the UK economy will be extended, meaning the Pound's outlook inevitably sours.

It is notable that at the present time Sterling is digging in at levels based on polling that suggest the Conservatives have a 10 point lead. We would imagine any notable shift in fortunes in the polls could have the potential to shift the Pound either higher or lower in the short-term.

We saw Sterling react in negative fashion to Theresa May's dramatic shift in the polls during the 2017 campaign, and wonder if the same will be true this time around in 2019.

"It appears to be more difficult than ever to predict the outcome of the election. Brexit will be the number one topic and may turn conventional election campaign wisdom upside down. On margin though, Boris Johnson appears to be the favorite, with a clear risk of another hung parliament," says Morten Lund, an economist with Nordea Markets.

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Volatility in Sterling has fallen dramatically over recent days after the Brexit process was put on pause, with GBP/EUR looking intent to consolidate above 1.1550 and 1.1650 while the GBP/USD is seen consolidating between 1.28 and 1.29.

We would be comfortable suggesting Sterling will trade around these levels over coming days as we expect very little new information to be put to the market as the parties prepare their election campaigns.

Prime Minister Johnson will be aware of the incredible shift in fortunes suffered by his predecessor Theresa May during the 2017 campaign. A botched Conservitive manifesto contrasted with  the Labour Party's strong focus on domestic issues, leaving May at sea as she was assuming the 2017 vote would be all about Brexit.

We sense Johnson is not prepared to leave the domestic ground open to the Labour Party and we suspect the Conservative machine will be better prepared this time around.

Nevertheless, the 2019 vote will ultimately be a Brexit election, particularly so from a currency market perspective.

"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. There is unfortunately also the possibility that Parliament will remain in a deadlock after an election," says Mikael Olai Milhøj, Senior Analyst at Danske Bank. "For Sterling, 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."

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