Sterling Bounces Back Following Announcement of Snap General Election

UK Prime Minister Theresa May has announced the Government will hold a snap General Election on 8 June 2017. This was ratified in Parliament by a supermajority of two-thirds in favour.

This announcement demonstrates the high level of confidence the Prime Minister has in her Government’s standing and, arguably, its lack of strong opposition. Indeed, it is understandable why she would seek to hold a General Election now, as polls currently show the Conservative Party holding a significant lead over Labour, the Liberal Democrats and the Scottish National Party.

Market reaction and our expectations

Since it was confirmed that the government will seek to hold a General Election, sterling has bounced back and is now trading at new monthly highs. In our view, this reflects the fact that an improved Conservative majority would strengthen the Party’s negotiating position against the European Union (EU). Sterling’s rally should be put in the context of the currency trading at depressed levels following last June’s referendum.

Near term, we expect the forthcoming general election to weigh on investor sentiment, as it will create further uncertainty. This is evident in the fact that UK gilt yields have continued their downtrend this morning, reaching new 2017 lows. The government has consistently pushed back against revealing too much about its negotiating position with the EU in advance and, as a result, its plans are largely unknown at present. However, during the campaigning process the various UK political parties may be forced to reveal their plans in regard of the UK’s secession. As a result, we may learn some of the areas that the Government wishes to focus on and others which it sees as ”˜red lines’.

If the Government’s manifesto seeks to dominate the middle ground and leads the market to believe it is seeking a ”˜soft’ Brexit, this may give further buoyancy to sterling. However, as we have seen since the last June’s referendum, any sterling strength is likely to be negative for the FTSE 100 Index, given it’s skew towards international earnings, and vice versa for sterling weakness. This will highlight the importance of well managed portfolios in a spread of investments.

Ultimately, we see potential for the election to be a significant positive for the UK in the medium term, as the victorious party is likely to hold greater authority when proposing and implementing their policies, whether this be in regard to Brexit negotiations or otherwise.

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