Pound to Euro Exchange Rate Would Like a Labour Coalition: BofAML's Scenarios Laid Out

Pound exchange rates

  • Forex Market Quotes:
  • Pound to Euro exchange rate: 1.1539, up 0.26%, day's best: 1.1544, low: 1.1498
  • Euro to Pound exchange rate: 0.8669, day's best: 0.8695, low: 0.8670

Foreign exchange markets await with interest the outcome of the UK election, the results of which should start to become clear at 10:00PM when the official exit poll is released.

And, those holding out for a substantially stronger Pound Sterling should be hoping the results point to the possibility of a coalition government lead by Labour being possible.

This is the view of FX Strategist Kamal Sharma of Bank of America Merrill Lynch Global Research.

Sharma tells clients that, “we think a Labour-led coalition would ultimately be the most positive scenario for GBP.”

However, the initial reaction by the Pound to such an outcome would be negative, something most analysts agree with.

The consensus holds that a strong Conservative win would be bullish for the Pound, and Sharma agrees. Remember markets hate uncertainty and should the Government enter a period of uncertainty it is likely to be negative for Sterling.

But, also like many other analysts, he believes this strength will be short-lived.

The reason to expect Sterling to ultimately turn lower lies with what the election outcome means for Brexit.

Recall, negotiations begin on June 19 and market attention will soon fixate on these talks and will likely be stuck there for the next two years.

The current Government have indicated they will adopt a robust approach to negotiations and will seek to exit the main EU institutions and ultimately give up membership of the single market which is seen as potentially slowing economic growth going forward.

As mentioned foreign exchange markets are likely to bid the Pound higher should the Conservatives walk away with an expanded majority.

This will largely reflect a relief that business-as-usual on the policy front will be likely.

“We are not convinced the GBP rally can be sustained,” says Sharma. “Large majorities are no guarantee that GBP will sustain its gains and with UK growth stalling, market complacency over the start of Brexit negotiations and positioning now broadly neutral, our bias would be to sell GBP rallies.”
Pound reaction to majority Government

Labour-Led Coalition is Good for the Pound

A hung parliament with a Labour-led coalition is seen as the only viable option which would initially be negative for Sterling argue BofAML.

However, analysts believe that while a potential coalition would likely be dominated by the Labour Party, the quid pro quo for support from other parties (potentially SNP and LibDem) could be a commitment to hold a second referendum.

This opens allows for markets to assume a softer Brexit - or no exit at all should a second referendum be offered - is more likely.

We have heard this before.

Deutsche Bank have also identified a coalition government as being positive for the Pound.

“In the event that the Conservatives dropped below 300 seats, a workable majority between the Labour Party, SNP, the Liberal Democrats, Green Party and Plaid Cymru may be possible,” says analyst Deutsche Bank analyst Oliver Harvey. “The initial market reaction could be to sell the Pound, but the medium term implications would be more bullish.”

It is argued that the support of the SNP, Liberal Democrat, Green and Plaid Cymru parties for a Labour government would be conditional on a ‘soft Brexit’ approach, such as EEA membership, and perhaps a second referendum on EU membership.

Book a rate, UK election

But Labour Majority = Bad for the Pound

A Labour-led coalition is positive for Sterling in that the country would potentially be spared the excesses of a fully-fledged Labour Government and their radical manifesto.

Should the party unleash their policies on the electorate in full, “GBP weakness could persist for longer as markets digest the full implication of Labour's macro policies,” says Sharma.

Above: Jeremy Corbyn disputes May's approach to dealing with terror. Will it resonate with the broader voting public though?

Brexit is still however what will ultimately matter for Sterling.

Brexit will likely be the dominant driver of subsequent moves in the Pound and BofAML think the initial sharp decline in GBP could be tempered if a Corbyn administration decides that its domestic policy agenda will take precedence over the Brexit agenda.

“Should it become clear that the Labour administration is moving toward a preference for Single Market access and therefore a softer Brexit, we think there is scope for a GBP recovery,” says Sharma.

As things stand, BofAML are forecasting the Pound to end 2017 at 1.24 against the US Dollar.

The EUR/GBP exchange rate is forecast at 0.88 by year-end, this is a Pound to Euro exchange rate of 1.1364.

These forecasts could however be ripped up on Friday morning.

Consensus Predictions for Sterling-Dollar

There is little to do now but wait.

Voting is underway and will continue through to 22.00 UK time, at which point the first exit polls will be released. This should provide some fairly strong indications about how the election has gone for the main parties.

On the final day of campaigning the battle appeared to be a two horse race, as Jeremy Corbyn’s odds to be the new Prime Minister were as short as 3/1 according to Oddschecker.

Contrast that to this morning and he’s already drifted to 11/2. The Conservative party, on the other hand, appear to have it all wrapped up; the odds of them winning the most seats is as short as 1/33 with some firms, implying a 97.1% chance of winning report Oddschecker.

The improvement in the Conservative's odds appear down to the final batch of polls which confirm Labour's advance had halted and was looking to reverse somewhat.

YouGov, who had reported one of the tightest polls, have confirmed their final poll saw the Labour party's momentum fading.

A poll of foreign exchange analysts conducted by Bloomberg shows that a hung parliament could see GBP/USD fall to 1.2350.

A large Conservative majority would see a rise to 1.31 while a small Conservative majority would see gains limited to 1.3025.

A Labour win on the other hand would see the exchange rate fall down to 1.2484.

The survey covered ABN Amro, BNY Mellon, CBA, CIBC, Mizuho Bank, MUFG, Nomura, Rabobank, Royal Bank of Canada, Saxo Bank and SEB.

Results Timeline:

1) An exit poll-based seat projection will be announced by the BBC when the polling stations close at 10pm.

These were spot on in 2005 and 2010, but incorrectly predicted the Conservatives would  ail to secure a majority in 2015.

The pollsters who carry out the exit poll acknowledge that the accuracy of the 2005 and 2010 polls was exceptional, and have suggested that a majority prediction within 10-20 seats of the actual outcome is a good result.

2) The first official seat declaration is usually made at around 11pm, with the first bellwether results expected to come in at around 1am from Battersea (which has consistently voted for the largest party since 1987) and Nuneaton (since 1997).

But with these seats less marginal than in the past, if it is close, eyes will be on Bury North which is expected to declare at 2am.

3) The seat has voted for the largest party in every election since 1984, and the sitting Conservative MP has a slim majority

4) A clear picture of the overall result should emerge between 3am and 5am as the bulk of the results are announced.