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Pound Sterling: "Limited Upside Ahead" as Odds on Corbyn Win Slashed

Conservative party lead dropping in the polls

  • Quotes:
  • Pound to Euro exchange rate today: 1.1598, down 0.31%, day's high: 1.1641, low: 1.1587
  • Pound to Dollar exchange rate today: 1.3005, down 0.17%, day's high: 1.3041, low: 1.2964

Pound Sterling is the worst-performing currency amongst the world's top 20 currencies at the start of the new week according to our relative-performance data.

Traders sold the Pound as they weighed up weekend polls that show Theresa May’s Conservative party has seen its commanding lead against the Labour opposition party whittled down.

Polling data shows that following the release of the various manifesto launches for the main parties the recent trend of improvement for the Labour party is continuing.

Four polls released on Saturday, for the Sunday papers, suggest that the Labour advance has strengthened.

(See latest YouGov result, see latest Survation result.)

And, for the first time it looks as though the latest Labour rise is coming at the expense of the Conservatives.

The Conservative lead was generally around 20 points or a little above in the middle of April. It's down to between 9 and 13 points in today's polls.

Recall that much of the Pound’s spring-time advance has occurred since Theresa May called for a general election on June 8.

Analysts argued that the expected victory the electorate would hand May would strengthen her hand in upcoming Brexit talks and the kind of margins required to sustain the Pound's rise were based on the Conservatives holding a majority in the region of 130-150 seats as per polling at the time.

Such a margin would allow for the implementation of an extended transition period now that the ending of the talks no longer coincide with the timing of the next elections.

Spread-betting providers Spreadex have seen movement in its Election Seats spreads, with the number of seats the Conservatives are forecast to win now falling to 384-390 compared to a peak of 395-401 last week.

The Pound's reaction to the latest developments confirms that political risk will inevitably start to play a role in Sterling price action going forward.

"GBP’s defensive reaction to this – as well as threats by Brexit Secretary David Davis that the UK will “walk away” from any trade deal if faced with a large Divorce Bill – suggests limited upside potential ahead of the General Elections. Look for EUR/GBP to move up towards the 0.8700 level," says analyst Viraj Patel at ING Bank N.V. in London.

EUR/GBP at 0.87 equates to a Pound to Euro rate at 1.1494.

"With markets having already priced the most GBP-positive outcome, the risks are much heavier to the downside," says Elsa Lignos, Global Head of FX Strategy at at RBC Capital Markets.

RBC Capital Markets have a "tactical long EUR/GBP position and have suggested buying cheap options for GBP downside".

Essentially this is a bet that the Pound will suffer further falls against the Euro using option products.

RBC Capital Markets noted back on May 12 that markets appear to be pricing in a Conservative majority of 130–150 seats on June 8 and warned that expectations would have to be lowered.

"While that, and the premium GBP carries as a result, could continue to rise, we think it more likely that both will partially reverse."

"As was the case in the run-up to the EU referendum, however, we expect shifts in market expectations for June 8 to throw up tactical trading opportunities and we currently favour being tactically short GBP," says RBC Capital's Adam Cole.

Cole maintains a medium-term negative view on GBP driven largely by a concern that UK growth expectations may already have overshot to the upside and that export performance following previous GBP falls will persistently disappoint.

That call appears to have been spot on.

"While a 9-point lead could still give Theresa May a comfortable victory on 8th June, the fact her lead has been slashed in half in just a few days may reinforce to financial markets that her victory is not a certainty. With three weeks to go before the election, another bad PR week for PM May and her team and the Tories’ lead over Labour could fall further into the low single figures, which could encourage Sterling selling ahead of this crucial vote," says Kathleen Brooks, an analyst with City Index, the London-based spread betting and retail trading provider.

Looking ahead, there is a chance that the blip could energise the Conservatives and their core voters.

The various political party leaders will be interviewed separately on BBC over the course of the week, starting with PM May this evening who chose not to attend the televised leaders’ debate last week.

If the issue of the funding of social care falls back in voter's minds and Brexit comes to the fore again, we could see the Conservatives take back their strong lead.

RationalFX more currency

Where Next for the Pound?

The Pound is now seen to be in a short-term downtrend against the Euro while it's rally against the Dollar is being questioned.

"Despite the gains made by the pound last week and its movement being driven by its major peers, today’s fall seems to confirm that the key driver for the pound is the coming election. Analysts will be watching polling figures closely in the next few weeks, which may determine whether or not the pound rises or falls in the lead up to June 8th,” says Paresh Davdra, CEO at foreign exchange brokers RationalFX

The GBP/USD had gone above 1.30 late last week but has since retreated.

"Whether or not GBP/USD falls below this level and back towards 1.25 may depend on how well team May deals with this polling shock," says Brooks. "Will they role back on some of the more controversial elements of their manifesto such as social care and pensions changes? If so, this could help her to regain the upper hand in the polls."

Brooks argues that Sterling’s reaction to this election won’t be on the minutia of policy put forward by each candidate, but by May’s expected margin of victory.

"If this continues to narrow then the lead up to the election could be a challenging time for Sterling," says  Brooks.

According to Deutsche Bank calculations, if the Conservative party fails to secure a majority in the region of 50-60 the Pound’s gains made following the election call are at risk.

The Pound enjoyed one of its best days in a decade, rising 2.7% to climb to a six-month high after Prime Minister Theresa May called an election for June 8.

Markets took the news as a sign that the government would be able to pursue a softer, more market-friendly version of Brexit on the basis of May enjoying a comfortable majority.

U-Turn on Capping “Dementia Tax” sees Labours Odds Shortening by the Hour

Theresa May’s U-turn on capping “dementia tax”, just four days after releasing the plan in the Conservative election manifesto, has caused the Labour party’s odds of winning the snap election to rapidly shorten.

The Conservative party’s manifesto threw out plans to place a cap on lifetime care costs, but in a desperate attempt to get her election campaign back on track, the Prime Minister has pledged to introduce a cap on lifetime care costs.

The latest polls shows that May’s manifesto release on Thursday led to Jermey Corbyn’s Labour party narrowing the gap on the Conservative party.

Today’s U-turn might ease a few worries inside the Tory party but it will portrays uncertainty and an untrustworthiness among voters and punters alike.

Twelve different bookmakers have cut the odds on the Labour party winning the most seats at the upcoming General Election.

Just ten days ago, Corbyn’s party was a massive 26/1 to win the most seats, however those odds are a thing of the past.

On Thursday, following the Tories release of their manifesto, the Labour party were cut to 12/1.

However, after today’s latest calamity their odds have shortened even further to 7/1 (one bookmaker remains at 12/1).

Since 10am this morning, Oddschecker have seen almost three times the amount of bets being placed on Labour to win the upcoming election compared to the Conservatives.

After the announcement was made around midday regarding the U-turn on “dementia tax”, there has been several four-figured bets on the Labour party at odds ranging from 15/1 to 12/1.

Oddschecker spokesman, Sam Eaton says:

“Theresa May is doing a fine job of evening out the odds for the upcoming election. Even though she’s still odds-on to win, May was 1/100 just two weeks ago. Jeremey Corbyn’s odds to become Prime Minister have been cut to as short as 4/1 with one bookmaker, however others are remaining firm at 8/1. Before today we weren’t seeing many serious bets for the Labour party, however the latest headlines have led many to believe Corbyn coming into power could become a reality.”

 

 

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