The Pound to US Dollar exchange rate has shed this week’s advances and by Wednesday morning was trending below the key level of 1.28 once again. This has been largely due to concerns about Britain’s latest polling data and rising uncertainty about the upcoming UK general election.
A new poll from YouGov, published on Tuesday night, has brought up the possibility of a ‘hung parliament’ – that is when no party wins a majority in a general election and as a result a coalition must be made.
YouGov has predicted that the Conservative party could win as little as 310 seats, down from the 331 seats the Tories won in 2015. This would leave the Tories below the 326 seats needed for a majority government. Labour could win 257 seats, an improvement over 2015’s 232 seats, according to the YouGov poll.
UK Prime Minister Theresa May has seen her own popularity drop along with the popularity of the Conservative party in recent weeks due to controversial manifesto pledges and mixed performance in debates. The popularity of the Labour party, meanwhile, has risen.
What does this mean for exchange rates? The Pound has performed strongly in recent months amid expectations that the Conservative party would easily strengthen its majority due to a weak Labour party, improving its capabilities in Brexit negotiations in the process.
The drop in the Conservative party’s popularity has called this certainty into question – and uncertainty is the worst enemy of financial markets.
This has also damaged the previously high market and public confidence in UK Prime Minister Theresa May. May called the election in the first place to secure a bigger parliamentary majority over what she perceived to be a weak Labour party.
Different election outcomes will have difference effects on markets, hence the uncertainty. However, power for Labour may not be all bad for traders.
The Labour party, if it was to attain a coalition with the Liberal Democrats party, would likely aim for a ‘softer’ Brexit. This could mean retaining access to the EU’s single market and freedom of movement for UK and EU citizens.
However, analysts have noted that the margin of error in YouGov’s polling is significant.
Other pollsters still forecast a Conservative majority and UK polls typically overstate the popularity of parties on the left. The polls were wrong for both the 2015 election and the Brexit vote last year. Betting markets still predict an over 80% chance that the Conservatives will win a majority.
With the UK general election taking place just over a week away, there is still time for things to shift a bit further however. Depending on the direction of polling shifts, Pound traders could become more confident in a Conservative win or see more uncertainty instead.
As for the US Dollar, it is likely to be influenced by PMI data and job stats due later in the week. If they disappoint, it has the potential to dampen bets that the Federal Reserve will hike US interest rates in its upcoming June meeting.
ISM’s key manufacturing stats for May will be published on Thursday, followed by Non-Farm Payroll data on Friday.
At the time of writing, the GBP USD exchange rate trended in the region of 1.2795. The USD to GBP exchange rate traded at around 0.7810.
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