UK election is closer than many initially expected – RBC CM

Today’s UK election is closer than many initially expected (bookies are ~25% priced for hung parliament) and the most likely outcome is still a Tory majority based on bookies and polls although the probability of other outcomes could be as high as 1 in 3, explains the research team at RBC Capital Markets.

Key Quotes

“The first thing to watch is the exit poll at 10pm BST (5pm ET). It was a lot more accurate than pre-election polls in calling the 2015 election and analysts expect it to be within 10–20 seats of the final outcome. The current Tory majority is 17. Market consensus seems to be that any majority of 50+ is a good outcome for Theresa May (and would see a small kneejerk GBP bounce). Anything well below that would see GBP selling in thin Asia liquidity.”

How could the UK general election affect the Forex Market?

Conservative victory with Absolute Majority (Scenario 1)

A Conservative victory with an absolute majority should be supportive initially for the pound. Stock markets would be relieved on the lower corporation tax outlook and a risk-on environment could be the expected outcome. However, with a focus on Brexit and PM May's hardline - "No deal is better than a bad deal" - approach to the negotiations, a hard Brexit outlook could equate to a bearish scenario to the pound eventually - (Note: Remain cautious of a 'buy the rumour sell the fact' trade - a Conservative victory is virtually priced in).

Conservative victory without Absolute Majority (Scenario 2)

With the narrowing of the polls and a trend that has been continuing, the possibility of a hung parliament should not be ruled out, (When no party has won enough seats to have a majority in the House of Commons). Such an outcome could be highly bearish for the pound due to the uncertainty for markets to deal with. However, in a hung parliament, the incumbent prime minister stays in office until it is decided who will attempt to form a new government - this could support the pound after an initial sell-off. (Note: A hung parliament does NOT necessarily mean a coalition government). 

Laborist victory (Scenario 3)

A balanced outcome for the pound with initial volatility on the basis of Labour’s manifesto. Initially, a lower pound could be the immediate outcome bias due to increased uncertainty and a reduction of inflows. However, a Labour victory should mean a softer Brexit outlook and austerity would be removed, (Fiscal easing lifting growth and inflation expectations). Higher real yields may offset the initial weakness in the pound. 

When is the UK general election 2017?

The United Kingdom snap general election is scheduled for June 8, 2017. The election will elect representatives for the 650 districts that make up the House of Commons, the lower house of the British Parliament.

Theresa May Called for UK Snap General Election

UK Prime Minister Theresa May has announced plans to call a snap general election on May 15th. Explaining the decision, Mrs May said:  "So we need a general election and we need one now. We have at this moment a one-off chance to get this done while the European Union agrees its negotiating position and before the detailed talks begin."