In the run-up to the snap general election the Pound has come under pressure, particularly as opinion polls indicated a narrowing of the Conservative lead over the course of the campaign.
Since Theresa May’s surprise decision to call the election GBP exchange rates have generally weakened, with markets spooked by the prospect of increased political uncertainty ahead of the all-important Brexit negotiations.
However, Sterling has stabilised somewhat in the final days of the campaign, thanks to investors continuing to bet that the Conservatives will hold onto their majority in line with convention wisdom.
Even so, given the fact that pollsters failed to correctly predict the results of both the 2015 general election and the EU referendum this relative confidence from the markets could prove misplaced, to the detriment of the Pound.
As Jasslyn Yeo, market strategist at JP Morgan, noted:
‘Markets appear to be pricing in a Conservative Party majority victory. However, we still see much uncertainty surrounding the UK election, where a higher turnout vote of young people could potentially turn the tables on investors.’
This could leave GBP exchange rates vulnerable to renewed downside pressure once the polls close, although a fresh bout of volatility seems likely for Sterling regardless of the election outcome.
Disappointing Night for Conservatives May Dent Pound Outlook
While markets are already anticipating a Conservative victory the outlook for the Pound varies widely depending on the amount of seats that the party manages to win.
Anything short of a solid increased majority could give rise to speculation that the dissatisfied elements of the party could oust Theresa May from her position as Prime Minister.
Regardless of the final outcome there is little arguing that May’s campaign was not decidedly fraught, with a public U-turn on the controversial dementia tax having undoubtedly damaged opinion amongst older Tory voters.
Even if there is no move to replace May at this juncture the Pound could still face downside pressure in the event of a Tory win.
Unless the Conservative majority expands notably the influence of Brexiteer backbenchers will continue to put pressure on the Prime Minister, increasing the chances of May pushing for a harder split from the EU.
With markets already braced for a solid showing from Tory voters, though, any boost to the Pound in the wake of a Conservative win could be somewhat limited.
GBP Exchange Rates Forecast to Plunge in Event of Hung Parliament
On the other hand, the Pound could suffer a sharp decline across the board if neither major party is able to secure a majority, resulting in a hung parliament.
As investors still consider such a result to be highly unlikely this could exacerbate the shock to GBP exchange rates if the Conservatives do lose control of the House of Commons.
A lack of a clear parliamentary majority could raise the risk associated with the imminent start of Brexit negotiations, with the UK likely to struggle to secure a particularly positive deal under such circumstances.
More than party politics, the issue of Brexit remains the major concern of investors, given the substantial impact that the process is set to have on the domestic economic outlook.
An outright Labour victory, meanwhile, is considered even more of an outside risk.
However, while a swing to Labour would weigh on Sterling in the short term this could still offer a boost to GBP exchange rates in the longer term.
Labour, on its own or as part of a progressive alliance, would be more likely to push for a soft Brexit, potentially retaining access to the single market as a result.
This would be a more positive outcome for the UK economy in the long run, with the Pound likely to rally on the hopes of a less acrimonious divorce from the EU once the initial shock of such a result faded.
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