Forecasts for Pound Sterling vs. Euro and Dollar on Various Election Outcomes

Jo Swinson

Above: File Photo, Liberal Democrat Leader Jo Swinson. © Liberal Democrats. Licensing conditions: Creative Commons.

- GBP/EUR at 1.1669 today

- GBP/USD at 1.2831 today

- More gains in Sterling to be unlocked by Conservative majority

- But Liberal Democrat victory best-case scenario for Sterling

- Labour win to trigger some downside in the Pound

Foreign exchange analysts at independent economics consultancy Capital Economics have released their latest suite of forecast for the major, economies, currencies and interest rates, and the verdict on Sterling is that the risks of major declines have faded substantially.

When looking at the UK economy and its currency in their latest suite of forecasts, analysts have understandably placed a great deal of emphasis on the looming December 12 General Election, as this should set the tone for the UK's economic performance in 2020.

Capital Economics note that the prospects of the Conservatives winning a majority at the December 12 election are not yet fully 'priced into' the foreign exchange markets, and therefore the upside potential in Sterling under such an outcome is yet to be fully realised.

"Any big moves in UK markets would require an unexpected election result or a decisive Brexit outcome. As a Tory victory and a Brexit deal is not yet fully priced in, such an eventuality would probably lead to modestly higher interest rates, bond yields, domestically-focused equities and a slightly stronger Pound," says Andrew Wishart, UK Economist at Capital Economics.

The call comes as the British Pound shows a positive correlation with the shifting odds of a Conservative majority.

The Pound rallied to a fresh six-month best this week after Brexit Party leader Nigel Farage said his party would not contest existing Conservative seats. Betting market odds for a Conservative majority shot up on the move, going from around 40% last week to 60% following the move.

We believe the Pound will continue to track shifts in odds of a Conservative majority over coming days.

Polls meanwhile point to a lead for the Conservatives of around 10 points, the judgement by markets is that this is enough to deliver a Conservative majority. Indeed, we saw Sterling bid higher on Tuesday when a new YouGov poll suggested the Conservative's lead over Labour had risen to 14 points.

pound tracks the polls

Image courtesy of Capital Economics

According to Wishart, a "Conservative win in the election followed by a Brexit deal could push the Pound higher... the Pound is likely to rise further if the Tories win and the chances of a Brexit deal jump."

But what would other potential election outcomes hold for Sterling?

"A Labour win could result in a small fall, despite the prospect of a softer Brexit or no Brexit at all," says Wishart. "There is a clear trade-off between the main parties’ stance on Brexit and their other policies."

A Labour Government could see Brexit overturned, and this holds some positives for Sterling, however the domestic policies that would come with such a Government could have a negative effect on the economy.

According to Capital Economics such a Government "could implement policies that will squeeze profits and may scare overseas investors". A "worst of both worlds" scenario for the Pound would entail a 'no deal' Brexit and a Labour government, but this is seen as unlikely. In this scenario, the Pound-Dollar exchange rate could fall to as low as $1.05 shows Capital Economics research.

However it is a win by Jo Swinson's Liberal Democrats that would offer the most material upside for Sterling it is said.

"The best outcome for Sterling would probably be a Liberal Democrat government. Their business-friendly policies and pledge to cancel Brexit could push the pound up to $1.40," says Wishart. "However, their chances of winning are slim, so Sterling is unlikely to enjoy the best of both worlds."

"So the markets are either going to have to cope with a hardish Brexit under a Conservative government with business-friendly policies or a softish Brexit under a Labour government that could implement policies that will squeeze profits and may scare overseas investors," says Wishart.

However on balance, "we think there is more upside risk for sterling than downside," says Wishart.

Outcomes for Sterling under various probabilities

Image courtesy of Capital Economics

Capital Economics base-case forecast is for the Pound-to-Dollar exchange rate to trade at 1.25 by year-end, where it should hover for the duration of 2020.

The Pound-to-Euro exchange rate is forecast to end 2019 at 1.14, where it will stay for the duration of 2020.

These forecasts are based on the assumption that there will be repeated delays to Brexit; i.e. no Conservative majority is forthcoming at the December 12 vote.

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