Viraj Patel at ING Bank N.V. has set out some key scenarios for Pound Sterling on the outcome of the election.
The British Pound was seen oscillating within familiar ranges against the Euro on what should be a pivotal day for the Pound and the Euro.
The first key test passed with relatively little damage being inflicted on either currency - the European Central Bank gave guidance as to future interest rate policy but no surprises were forthcoming.
The big moves should come when the election results are released and we have been hearing from the best and brightest in the world of FX research on where Sterling might go.
At present, expectations are for the Conservatives to expand their majority in parliament.
Yesterday 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.
To help calibrate expectations, we have been bringing the views of the foreign exchange analyst community.
Big Moves Seen Alongside Election Results
Analyst Viraj Patel at ING Bank N.V. has set out his views on the likely outcome for Sterling and we see the prospect for big moves in the Pound to occur.
The Pound to Euro exchange rate could move anywhere between 1.11 and 1.1765 over the next 24 hours argues the analyst in a briefing to clients ahead of the UK election.
The Pound to Dollar exchange rate could meanwhile go between 1.23 and 1.32.
So volatility should certainly be a feature of coming hours if Patel is correct.
However, for Patel, it is important to look ahead and imagine what the outcome of the vote means for the all-important impending Brexit negotiations.
That is why there are two distinct phases to consider with regards to the Pound’s reaction.
The Initial Reaction
ING are operating from a base-case scenario that sees the Conservatives win the election.
The initial move by Pound Sterling as the outcome becomes clearer is one based purely on the prospect for political stability.
Patel says 50 is the magic number of the Conservative majority needed to push Pound Sterling higher.
Pound Sterling’s Magic Number: 50, this is the majority the Conservatives must win
GBP/USD could go as high as 1.32 and the GBP/EUR as high as 1.1765. By contrast, Sean Callow at Westpac Bank believes the Pound could go as high as 1.35 against the Dollar.
See Westpac's cheat-sheet here.
Analysts at UniCredit say a larger Conservative majority will reduce near-term political uncertainty.
“We would expect the immediate reaction to be a rally in sterling. Cable may well break back above the 1.30 level, while EUR-GBP could slip temporarily towards its April/May lows in the 0.85 area,” says UniCredit's UK economist Daniel Vernazza.
EUR/GBP at 0.85 equates to a Pound to Euro exchange rate of 1.1765.
Status quo: a narrow Conservative win
If a narrow Conservative majority is achieved the GBP/USD could hover near 1.30. This is broadly in line with consensus estimates of the outcome. ING say the GBP/EUR could go to 1.1628.
Hung Parliament: Chaos for the Pound
The GBP/USD could go as low as 1.23. The GBP/EUR exchange rate could go as low as 1.11.
Consensus Predictions for Sterling-Dollar
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.
Phase 2, the Bigger Picture: Brexit Matters
Most analysts agree that Sterling is likely to quickly start taking direction from Brexit negotiations once the election is out of the way.
Unless of course a hung parliament results in a weak minority Government or coalition-building negotiations are ongoing.
Nevertheless, the UK and EU are due to meet on June 19 and minds will be sharpened on the type of Brexit that might be forthcoming.
“Under a Tory majority, clear steps towards a transition deal may be needed to lift GBP higher. If a credible Labour-led coalition can be formed swiftly, then the greater odds of a softer Brexit could help GBP recover from any initial sell-off,” says Patel.
If May Wins
If Theresa May is in command of Government, how ‘hard’ she is regarding negotiations will be key.
If her cabined reshuffle sees pro-Brexit remaining in place, the GBP/USD rate could hover around 1.30. The GBP/EUR at 1.1627.
If May takes a softer approach and appoints a cabinet that is more centrist that is more diplomatic in its Brexit tone, a good transitional deal could be reached.
ING see GBP/USD rising to 1.35 on such an outcome and GBP/EUR going to 1.2048.
Above: The FT's Roger Blitz and Viraj Patel, forex strategist at ING, discuss the way the pound is likely to move following the UK election.
If Corbyn Wins
This is the surprise outcome and the impact on Brexit negotiations will be notably different to the existing setup.
A Labour-LibDem-SNP coalition could see the higher odds of Brexit outweigh concerns over Labour’s economic policies. ING see the GBP/USD going to 1.28 and GBP/EUR going to 1.1364.
“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 analys Oliver Harvey at Deutsche Bank. “The initial market reaction could be to sell the Pound, but the medium term implications would be more bullish.”
The political abyss option where no coalition is formed is all-out bad for Sterling.
The uncertainty this situation would provoke is forecast to see GBP/USD going to 1.23 and GBP/EUR going to 1.11.
1) An exit poll-based seat projection will be published 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.
Pound Chugs Along into Results Night
Sterling favoured the bottom of a narrow overnight range against the dollar with currency players on the sidelines awaiting today’s flurry of action.
The pound could raise the roof of its range if Theresa May can hang on to power and do so with a stronger majority in parliament that gives her more clout to call the shots on Brexit. Any shock outcome could leave the pound vulnerable.
It’s critical for Britain to get its political house in order ahead of June 19, the day Britain and Brussels are expected to start formal Brexit negotiations that could take years to hammer out.