Pound and Brexit Election Special: How Will the Pound React to the Winter Election?

GBP EUR Higher as German Economy Loses Momentum

This Christmas sees an extra dimension to the usual seasonal spirit, with December 12th the first British Winter election since 1923. Dubbed the ‘Brexit Election’, the ongoing saga over the UK Referendum result and ensuing political uncertainty is featuring highly.

Historically, elections have seen the pound losing steam in the run up to the events, as the markets prepare for the various outcomes. Sterling has however been stronger as we approach the vote, why is this and what can we expect ahead?

A Brexit Election

One reason is the relationship between no-deal Brexit and sterling weakness. No-deal Brexit is regarded as negative by financial markets, owing to the uncertainty it represents. This election largely rules out or at least postpones that possibility.

A Conservative majority (which the polls are currently indicating) should see Boris Johnson’s Brexit deal passed. This removes the immediate threat of no-deal although it will still be a possibility down the line.

A Labour victory, or pact with either the Lib Dem or Scottish National Party (SNP), is billed as a second referendum on a renegotiated deal by Labour and likely another Referendum with the new deal or Remain as options. This would also indicate that no-deal is much less likely.

TV Debates Could Prove a Twist

The first televised debate is 19th November on ITV, between Corbyn and Johnson. The Lib Dems and SNP have failed in their legal challenges to feature on this debate.

Other debates are Sky News on November 28th, BBC Friday 29th, and BBC December 6th. Friday 22nd November will also see a special BBC Question Time featuring Johnson, Corbyn, Nicol Sturgeon and Jo Swinson, take questions from members of the public.

TV debates are another factor used by the markets to gauge the potential outcomes on elections, by assessing how well or badly they performed. It is felt a strong performance by Nick Clegg, of the Lib Dems in the 2010 election, helped sway the vote and earn the party coalition government with the Conservatives.

Will the Pound Weaken on the Election and in 2020?

Whilst the polls are quite clear that the Conservatives are leading, we know from history the polls have not always got it right. The EU Referendum and the last two elections are examples in point, nothing can ever be completely guaranteed in advance in such cases.

Both the Conservative and Labour are announcing some rather large increases in borrowing costs that historically might have alarmed markets and seen the pound losing value.
We also know that the path on Brexit has been anything but straightforward and to assume a smooth passage after the election could be misplaced.

Assuming a Conservative victory, we then need to see the Withdrawal Bill being passed, and we then will have the next task of negotiating the new future relationship and trade deal with the EU.
Many reports suggest that the agreed transition period which is due to end December 2020 might well have to be extended or could lead this date becoming another cliff edge ‘no-deal’ date we have become all too familiar with.

In fact, the deadline to extend the December 2020 date is July 2020, so there will soon be another deadline associated with no-deal once the election is over.

Sterling has rebounded on expectations the Conservatives will ‘Get Brexit done’, it follows therefore that any signals or outcomes suggesting this will not be the case, could change the market’s perceptions of events, and trigger increased volatility for the pound ahead.

For more information on exchange rates during this volatile period, you can contact myself, Jonathan Watson, using the form below.