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Pound-Dollar Rate Lags in Global Advance against U.S. Greenback as Election Uncertainty Weighs

© moofushi, Adobe Stock

- GBP lags rivals in global pushback against the USD. 

- Amid election uncertainty and fear of hung parliament.

- Absence of clear winner is near worst of all outcomes.

- Pantheon says narrowing polls to weigh on GBP up ahead.

- UBS traders look to buy GBP dips but waiting on poll move.

The Pound lagged some major rivals in a global pushback against the Dollar Tuesday amid uncertainty and unease over the likely outcome of a looming general election, although some say the British currency could be further weighed down in the weeks ahead by narrowing opinion polls. 

Most 'risk' currencies advanced against the Dollar Tuesday amid reports suggesting the White House could remove some tariffs that were recently imposed on imports of Chinese goods, which will be good news for the global economy if it happens and so has deflated the safe-haven Dollar against some currencies. However, the Pound saw a sluggish start to the session and lagged all but safe-haven and European rivals others in an almost global move agaijnst the greenback.

UK voters have been called back to the ballot box for December 12 and despite the governing Conservative Party having what some pollsters say is a low double-digit lead over its nearest rivals, there is abnormally high uncertainty over the likely outcome with The Brexit Party also now on the electoral field. Fears are that the newly minted party of eurosceptic stalwart Nigel Farage will eat into enough of the government's prospective base to deny the Conservatives a parliamentary majority, with unknowable consequences. 

Currencies, much like other financial asset prices, dislike uncertainty but particularly the political kind that often brings with it the prospect of change in the established economic policy order. That, and the level of change that is on the table with Brexit and the election, is why the Pound Sterling rally that characterised much of October was stopped in its tracks late last month when parliament agreed to a ballot on the fourth asking by Prime Minister Boris Johnson - who was by that time without a majority.

"The worst outcome would be a small Tory majority of under 20 seats or another hung parliament, which would perpetuate the instability of the last year. Strident Brexiteers within the Tory party would remain a disruptive influence, keeping the risk of a WTO crash-out in December 2020 very much alive. The PM also might not be able to pass the current Withdrawal Agreement Bill without incurring amendments that would then blow apart the broad coalition of Tory MPs currently supporting it. So if, as we expect, the polls narrow over the next five weeks, sterling likely will come under renewed downward pressure," warns Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

Above: Pound-to-Dollar rate shown at 4-hour intervals.

The Brexit Party said Friday it would stand 600 candidates in parliamentary seats across England, Wales and Scotland after Boris Johnson and his Conservative Party rejected the idea of an electoral alliance. The insurgent party, established in the Theresa May era to fight what it bills as a "betrayal of Brexit", is targeting both the opposition Labour Party in its Brexit-backing heartlands in Northern England as well as the Conservatives in their leave-supporting southern strongholds. 

A parliamentary majority for Prime Minister Boris Johnson would likely see the EU withdrawal agreeement that was finalised in October then sail through the House of Commons and with a 'no deal' Brexit likely omitted from the Conservative manifesto, the market's worst case outcome will have been buried as a prospect once and for all. But failure by the Prime Minister in his bid for a parliamentary majority would open up a can of worms for the Brexit process, the UK economy and its currency.

That latter outcome could mean The Brexit Party becomes kingmaker after the December vote - playing a role similar to that currently held by the now marginalised, angry and activist Democratic Unionist Party of Northern Ireland - which would almost certainly mean the prospect of a 'no deal' Brexit is kept alive and well over the coming years. But it could also mean the Brexit pursuit is, for a time at the very least, abandoned altogether if the ballot outcome facilitates a remain-backing coalition government.

"Brexit is a "single factor issue" that is going to add substantially to the number of swing seats, and it's also going to increase the size of the swings which occur. For instance, if a constituency voted heavily to Leave in the 2016 election (i.e. 55% or greater) and the current MP has taken a decisively pro-Remain stance, there is a high chance of a big swing against that MP in the December election. At least two things will happen as a result of this: 1) the election will remain very difficult to call and 2) tactical voting will be occurring in loads of constituencies. We would also expect to see a sharp rise in the number of electoral pacts on a seat-by-seat basis," says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

Above: Pound-to-Dollar rate shown at daily intervals.

The opposition Labour Party has typically made the most economic use of language when setting out its Brexit position but the party, which is heavily reliant on support from leave-backing seats in some parts of the country, is after three years unable to shake the allegation that its commitment to the endevour is doubtful at best. And after surprising markets with a strong showing in the 2017 election, few are willing to rule out the idea of a repeat performance.

But with greater competition on a better-banked 'remain' side of the electoral field, there are also few who see the opposition going on to win the outright majority necessary for it to govern alone. But that doesn't preclude a coalition with the anti-Brexit Liberal Democrats and the Scottish National Party that views Brexit as a material change of circumstance that warrants a second independence referendum. That might be the worst scenario for Sterling from here, even if the Brexit vote in 2016 did itself send the Pound tumbling by nearly a fifth against the Dollar before reaching its lowest ebb.

The prospect of a second Scottish independence referendum being held at any point would never be welcomed by the Pound but if that lands on the table at the same time as a government led by opposition Labour Party leader Jeremy Corbyn, then the UK currency could find itself with an even greater headache. Corbyn, an avowed Marxist who's pitted himself in opposition to Western capitalism and free markets all of his political life, is pledging to deliver "radical change" for "the many, and not the few". 

"Political uncertainty is containing GBPUSD price action, with the pair consolidating then later slipping down to the initial support at 1.2875/80 as the USD trades bid on US-China trade dea; optimism. The desk prefer a slightly more balanced stance approach today and would look to trade off the technical levels and short-term momentum, until some divergence appears in pre-election opinion polls," says Michael Nair, an FX trader at UBS. "Medium-term, we still have a mild bias to buy on dips. Support at 1.2875/80, 1.2840/50 1.2790/1.2800 and 1.2750; resistance at 1.2945/50, 1.2975/80, 1.3000/15 and 1.3050/60."

 

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