Sterling Jumps Through 1.20 vs. Euro and 1.34 vs. Dollar on Exit Poll Showing Sizeable Conservative Majority

Pound surges on exit poll

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- Pound-to-Euro exchange rate: 1.2065 up 1.79%

- Pound-to-Dollar exchange rate: 1.3476 up 2.10%

- Pound-to-Australian Dollar exchange rate: 1.9428 up 1.12%

- Euro-to-Dollar exchange rate: 1.1167 up 0.32%

Pound Sterling is embarking on a sizeable rally that sees it start to retake the levels it lost in the night of the infamous 2016 EU referendum.

In what could well prove to be another infamous night in UK politics, the results of the exit poll of the General Election predicts Boris Johnson's Conservative party are on course for a landslide unseen for the party 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 therefore 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 years of uncertainty that has been hanging over the UK economy, and its currency.

Pound performance

Above: Sterling's gains on the result of the exit poll

In the first concrete sign that the exit poll has correctly called the result, the former Labour stronghold of Blyth Valley has fallen to the Conservatives who polled 17440 against 16728 for Labour in this traditional Labour heartland seat which the party has represented since 1950.

Subsequent seats have confirmed a solid swing to Johnson's party that should mean the majority predicted by the exit poll should ultimately be delivered.

"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.

Sterling surges

Patel says Sterling "should trickle higher as Asia trading comes online."

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?

Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics explains that it was Professor David Firth of Warwick University who established the statistical methodology that has been used for the exit poll since 2005, and he believes it should typically predict the main parties’ seat totals with an error in “roughly the five to 15 seat range”.

"Abandon all your priors when the UK exit poll is released at 22:00 - it has a very good track record since its current methodology was introduced in 2005. Its biggest error in forecasting Tory seats was in 2015 (out by 15). Its average absolute error since 2005 has been just 8," says Tombs.

Exit poll

Image courtesy of Pantheon Macroeconomics

"It has been costly for GBP traders to doubt the exit poll’s findings; this chart shows that the shift in sterling at 22:00 in 2015 and 2017 was extended during trading as the results came in," adds Tombs.

However, Phil McHugh, Chief Market Analyst at Currencies Direct suggests the Pound's rally could soon find a ceiling, as the outcome was largely expected by the market:

"The pound has rallied sharply over 2% on the news on fact that we are seeing a comfortable Conservative majority in the exit poll. The strength of the outcome has given traders the confidence to really buy into the outcome. If the result is confirmed we expect some minor additional gains as a solid majority will smooth the additional legislative process going forward for the Conservative government. However most of the upside does now seem baked in to the pound for now and in the longer term there will likely be bumps ahead to finalise Brexit by the end of 2020."

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Why the Pound has Reacted Positively to Expectations of a Conservative Majority

The Pound remains an effective gauge for expectations of the performance of the UK economy in the future; the market's understanding of the General Election result is that UK economic growth is likely to pick up and potentially deliver an interest rate rise at the Bank of England.

Kallum Pickering, Senior Economist at Berenberg Bank spells out three positive implications for the UK economy and for financial markets of the projected outcome of the election:

1) "A clear majority for Johnson should virtually guarantee an orderly Brexit on 31 January 2020, which – relative to the Brexit uncertainty of the last three years - would be a positive

2) "the Conservative government looks set to unleash a sizeable investment-focused fiscal stimulus; and

3) "the risk that Labour leader Corbyn could implement his left-wing plans will largely vanish."

Pickering adds these factors will help to lift medium-term confidence and spending.

* Time to move your money | Get industry-leading exchange rates and maximise your currency transfer potential with Global Reach. Speaking to a currency specialist will also help you to capitalise on positive market shifts while protecting against risk. Find out more here. * Advertisement