Pound Sterling Surges on Election Outcome

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- Pound-to-Euro exchange rate @ 1.1825, down 0.30%

- Pound-to-Dollar exchange rate @ 1.3159, down 0.50%

- Sterling edges lower as odds of Cons. majority slide below 70%

- Could rise sharply should exit poll show large Conservative majority

- Will fall on hung parliament or thin Conservative majority

- Analysts give their GBP/EUR and GBP/USD forecasts

The Pound shot higher against a host of major currencies on the results of the exit poll of the General Election, that showed Boris Johnson's Conservative party were on course for a landslide unseen since the era of Margaret Thatcher.

The Pound surged through the 1.20 barrier against the Euro and 1.34 against the Dollar after the exit poll suggested the Conservatives were on course to win 368 seats, up 51 since 2017 while Labour were on course for their worst result since 1924 with 191 seats, a loss of 71.

The Scottish National Party are tipped for 55 seats and the Liberal Democrats 13.

The Conservative's will win a majority of 86 seats in Britain's election if the exit poll is correct, giving Johnson the numbers in parliament he needs to deliver Brexit on January 31, and in doing so put an end to months of uncertainty that has been hanging over the UK economy, and its currency.

"Both the Pound and FTSE 100 futures have rallied sharply on the exit poll news, as the market takes the figures as a positive development. If the result does turn out to be anything like this, then Boris Johnson has what he craves, a clear majority to push forward with his Brexit plans and reshape the country after years of austerity," says Chris Beauchamp, Chief Market Analyst at IG. "As the Pound leaps against the euro and the Dollar, the message from investors is clear, and should be reinforced when cash trading begins tomorrow – a possible end to years of delay and uncertainty, as Boris Johnson wins a handsome victory and cements his reputation as the man that ‘got Brexit done’."

In the last five national elections, only one exit poll has got the outcome wrong - in 2015 when the poll predicted a hung parliament when in fact the Conservatives won a majority, taking 14 more seats than forecast.

"The pound could move to 1.35-1.36 area on confirmation of this through the night. One thing UK asset prices have been craving since 2016 is a stable working UK government. An 86 seat Tory majority would provide just that. Expectations will be for swift Brexit progress," says Viraj Patel, a strategist at Arkera.

The obvious risk to Sterling's rapid appreciation is that the exit poll proves to be wrong, but what are the chances of such an error materialising?

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Earlier:

The Pound endured a volatile day that reflect the market's waning confidence that the result of the election would deliver a Conservative majority, with a final Comres poll out overnight showing the Conservative's lead against Labour had shrunk to just 5 points as more undecided voters opt for Jeremy Corbyn's message.

Comres said Labour have increased their vote share by three points, leaving them at 36%, while the Conservatives are unchanged at 41%. If this is replicated in Thursday's vote the foreign exchange market will likely be trading notably lower on Friday as the UK wakes up to another hung parliament or impossibly small Conservative majority.

"The Conservatives failing to win a majority would come as a shock, and could result in a significant drop in the Pound. We suspect that it could fall as low as $1.20/£," says Oliver Allen, UK Economist with Capital Economics.

The next 24 hours will set the tone for the next five years of UK Brexit and economic policy, and will therefore be crucial to the direction of the British Pound.

"Sterling looks set for yet another night of politically driven volatility as the UK essentially chooses between a massive Tory led fiscal expansion, and an even more massive Labour led fiscal expansion," says Ranko Berich, Head of Market Analysis at Monex Europe. "Although a Conservative majority is a comfortable base case at the moment, after the shock poll results of the original referendum and the US Presidential election, we believe it is far from fully priced in."

The undaunted confidence exhibited by Sterling exchange rates alongside the rise in bookmaker odds for a Conservative majority perhaps reflects the final findings of the polling companies who released their final results overnight:

Kantar had the Conservatives unchanged on 44%, and Labour unchanged on 32%, suggesting a healthy Conservative majority, if replicated today.

Deltapoll had the Conservatives up 1 point on 45% and Labour up 2 points on 35%; the Labour improvement is not enough to deny the Conservatives a majority if replicated today.

Survation's final poll has the Conservatives on 4% and Labour up 3 points to 34%. Here we see Labour picking up gains once more, but not enough to trouble the Conservative majority.

Putting all the polls together, Politico's Poll of Polls shows Conservatives ending the campaign with 43% vote share and Labour on 34%, a nine point advantage to the Conservatives.

This would be consistent with a Conservative majority.

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Forecasts for the Pound under Different Election Outcomes

The British Pound will likely tread water for much of Thursday, with traders opting to take exposure to the currency off the table in anticipation of some solid guidance as to how the vote has gone.

A key moment comes at 10PM when the exit poll is released; typically this gives an accurate flavour of how the vote went. In 2015 it correctly called the Conservatives as the largest party, this was significant at the time as the polls had been saying Labour would emerge with the most seats heading into the vote.

Image courtesy of Pantheon Macroeconomics.

In 2017 the exit poll correctly called the Conservative victory, albeit with no majority.

If the exit poll suggests a sizeable win for the Conservatives, expect the Pound to trade higher in relief.

However, should the exit poll suggest a small majority, or a hung parliament, expect Sterling to move lower as nerves emerge. If the exit poll suggests the outcome will be tight then expect volatility in the Pound to extend through the night as the outcomes of the votes in the various constituencies are made clear.

Analysis from the investment banking unit of Westpac shows the odds of a clear-cut Conservative majority of some 60-100 seats stands at 10%, while a 20-40 seat Conservative majority is seen at a 40% probability.

Under the first scenario, the GBP/USD exchange rate is forecast to rise between 5 and 7%. Under the second scenario the exchange rate is forecast to rise between 2 and 4%.

"GBP/USD could test its 2019 high of 1.3380 and GBP/EUR leap to 1.20 if the exit poll after UK voting ends around 22:00GMT suggests the Tories have won a Commons majority. That would keep Boris Johnson in 10 Downing Street and allow him to lead Britain out of the European Union," says Robert Howard, an options analyst at Thomson Reuters. "GBP/USD might even get to 1.35 if the exit poll tips a Tory majority much larger than the 24 to 38 seats recently forecast by Focaldata, YouGov and Datapraxis."

Researchers meanwhile see a slim and vulnerable Conservative majority of less than 15 seats as commanding a 20% possibility.

Under such a scenario Westpac are forecasting GBP/USD to fall 2%.

A hung Parliament, where the Conservative are the largest party but Labour lead a coalition government is given odds of 15%.

This scenario could see the GBP/USD exchange rate fall between 3 and 5% according to Westpac.

"GBP/USD and GBP/EUR could slump towards 1.2769 and 1.1623 respectively – their lowest levels through the UK election campaign – if the exit poll signals a hung parliament," says Thomson Reuters' Howard.

Other probabilities are a hung parliament with Labour as the largest party (10%) and a slim but vulnerable Labour majority led by the Corbyn leadership (5%).

Theses scenarios would see a fall in GBP/USD of between 7-8% and 10% respectively.

James Rossiter, Head of Global Macro Strategy at TD Securities says there is a 55% chance of a large Conservative majority (340+ seats), and Sterling will likely rise to 1.3381 against the Dollar and 1.2070 against the Euro under such a scenario.

A small Conservative majority is seen as commanding odds of 30%, and such an outcome could see GBP/USD trade to 1.2880 and GBP/EUR to 1.1614.

A Labour-led coalition is seen to be the next most likely outcome at 12%, this would see GBP/USD decline to 1.2770, and GBP/EUR to 1.1514, according to Rossiter.

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