Snap! Crackle... Pop? The UK election's meaning for sterling

Jeremy Cook Chief Economist and Head of Currency Strategy

Called by Theresa May a little after Easter as a need to heal divisions within Westminster following the EU referendum Polling day is June 8 th (a week tomorrow) Exit polls available as polls close by 10pm Exit polls were extremely accurate in 2015 and 2010, opinion polls not so much Turnout will once again be crucial given a reported increase in voter registrations in 18-24yr demographic prior to the application closure date. Previous elections that broke with the 5 year frequency have seen lower than usual turnouts. 2001 was a June election where turnout fell below 60% for the first time since 1918. Political fatigue is setting in though (not just commentators!)

Party Candidate Conservative and Unionist Party 638 Labour Party 631 Liberal Democrats 629 Green Party of England and Wales 457 UKIP 378 Independent 187 SNP 59 Plaid Cymru 40 Christian Peoples Alliance 31 The Yorkshire Party 21 Alliance Party of Northern Ireland 18 Social Democratic & Labour Party 18 Sinn Féin 18 Democratic Unionist Party 17 Ulster Unionist Party 14 Official Monster Raving Loony Party 12 British National Party 10 Pirate Party 10

60 50 40 30 20 10 0 CON (%) LAB (%) LD (%) UKIP (%) Grn (%) Source: Ukpollingreport

Source: Yougov

Idiosyncratic risks give way to a GBP focus 106 105 104 103 102 101 100 99 98 97 96 95 94 93 GBPUSD GBPEUR Tradeweighted sterling Source: Bloomberg

6 Slight negative sterling bias in options markets 4 2 0-2 -4-6 -8-10 GBPUSD 1M Risk Reversal GBPUSD 3M Risk Reversal GBPEUR 1M Risk Reversal GBPEUR 3M Risk Reversal Source: Bloomberg

Fall off has been in the past week or so 4 3 2 1 0-1 -2-3 GBPUSD 1M Risk Reversal GBPUSD 3M Risk Reversal GBPEUR 1M Risk Reversal GBPEUR 3M Risk Reversal Source: Bloomberg

Source: Bloomberg

3 scenarios of the UK election translate very simply into outcomes as they pertain to Brexit A decent Tory majority (more than before the election was called) A diminished Tory majority (fewer than before the elections was called) A hung parliament A decent Tory majority is still the most likely and the status quo for Brexit negotiations as it stands at the moment. Campaign has hinged on stronger hand although we have our doubts that that will materialise. A cabinet reshuffle is very likely. A diminished Tory majority could trigger another Tory leadership contest and will see leadership on Brexit issues pass to David Davis A hung parliament would limit any negotiations taking place until a coalition was built which is an unlikely conclusion. If a coalition was formed there is a slim chance of a softer Brexit if language around immigration can soften.

YEAR MONTH DAY EUROPEAN UNION INDIVIDUAL EUROPEAN NATIONS UK March 29 Article 50 triggered Article 50 triggered April 23 29 EU Council on Brexit Guidelines French Elections: First round 7 German Regional Elections: Schleswig-Holstein May 7 14 French Elections: Second round German Regional Elections: North Rhine-Westphalia elections 25 NATO Leaders meeting NATO Leaders meeting NATO Leaders meeting 26 G7 Summit G7 Summit G7 Summit 8 UK General Election June 11 or 18 22-23 European Council French Elections: Legislative 2017 July TBC 8 Greek Bailout review G20 Meeting in Hamburg G20 Meeting in Hamburg G20 Meeting in Hamburg 11 Norway General Elections September 16 24 German Federal Elections Lib Dem Party Conference TBA Possible Catalonia Independence Referendum TBA Conservative Party Conference October 19-20 European Council TBC Luxembourg Parliamentary Elections November TBC Slovenia Presidential Elections 17 European Social Summit December 14-15 European Council 14-19 WTO Ministerial conference TBA European Parliament Elections European Parliament Elections European Parliament Elections TBA Austrian Parliamentary Elections January 28 Finland Presidential Elections 2018 March June 22-23 End of Q1 28-29 European Council Soft deadline for negotiations European Council Soft deadline for negotiations September 9 Swedish General Elections Soft deadline for negotiations Ratifications in Parliament Ratifications in Parliament October Expected European Council December Expected European Council 2019 Spring March 25/04/17 29 Article 50 period ends SNP target for Scottish independence referendum Article 50 period ends

We think that we will see Tories emerge with a majority of 50-70 seats, up from the current level of 17. Sterling will initially rise as long as the majority is above 50 anything less and we think GBP will slide. A hung parliament would prompt a 2-4% decline as we saw back in 2010 but amplified by Brexit concerns. We remain net negative sterling against the euro but see gains against the USD. Brexit remains the crucial issue for the UK economy and any government will have to likely increase spending to deal with holes in budgets from lower tax revenue. This will be to prevent the political fall out of a recession in the midst of the negotiations.

Questions

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