The GBP has been relatively stable heading into the election in Thursday, indicative of the fact that a Tory victory and outright majority is still a very high probability, even if the race has tightened during the campaign explain analysts at Amplifying Global FX Capital.
“The options market is showing the market is still wary of a negative outcome for the GBP. Short term vol is moderately elevated, and risk reversals indicate the highest downside GBP risk since the Brexit vote.”
“A failure of the Tories to regain an outright majority, would potentially see the GBP significantly weaker. A much worse outcome, but highly unlikely, is for the Tories to fail to get enough seats to control government. This would be very negative for the GBP, seeming to throw considerable doubt on the UK’s commitment to Brexit, but still largely locked into it, and greatly damage its ability to negotiate effectively with the EU.”
“Currently, Conservative (Tories) holds 330 seats in the 650 seat House of Commons (a 5 seat outright majority), Labour holds 229, Scottish National Party holds 54 out of a maximum possible 59 Scottish seats, and the Liberal Democrats hold 9 seats.”
“An increase in the number of Tory seats will probably see a moderate knee-jerk increase in the GBP. However, UK economic data has underwhelmed in recent months and the economic headwinds from Brexit may be starting to drag on the economy. The Brexit process remains a long and difficulty one and upside for GBP is likely to be limited.”
“EUR/GBP trading near the top end of its range, consistent with the strengthening confidence in the outlook for the Eurozone economy and diminished political risk since the French election.”
“Fundamentally we prefer the EUR over the GBP and would prefer to use a post-UK election recovery in the GBP to buy EUR/GBP.”