Sterling Falls as Hung Parliament More Likely

EURGBP Forecast: Will Euros Continue to Become More Expensive?

Sterling dropped against the euro, dollar and various other currencies this morning, leaving the pound to euro exchange rate at 1.1843 and the pound to dollar rate at 1.3132 at time of writing. The drop comes following the publication of the MRP poll last night which showed that the Conservatives’ majority had been cut to 28, down 40 seats from the last MRP poll on 28th November.

YouGov’s MRP poll showed that the Tories’ majority is now in the margin of error, increasing the likelihood of a hung parliament during tomorrow’s election.

Markets Shaky with Loss of Tory Support

The MRP poll is a relatively respected survey carried out by polling company YouGov. The projections are based on survey data on a constituency basis. The poll surveys over 100,000 people, considerably larger than the usual polling sizes.

Sterling has been on the up for a few weeks, with markets taking comfort in the Conservatives’ lead in the polls. It is widely believed that a Conservative majority would bring an end to Brexit uncertainty. This would reassure business for the future, maintaining the attraction of foreign investment into the country through an orderly Brexit. A hung parliament would throw the Brexit certainty into disarray, probably having a repeat of the stalemate of the last few years.

Assuming the MRP poll is accurate, the Conservatives would win 339 seats, with Labour winning 231 seats. Boris Johnson’s party would be on 43%, and Jeremy Corbyn on 34%. A 10-point difference gives more certainty to the majority, and any Tory majority under 340 would not be warmly received by the markets.

History Repeating Itself

This will shift power back to the European Research Group (ERG), the group of Eurosceptic Tory MPs who advocate full divergence from EU rules. If the Tories’ majority is small, the ERG will once again prove a problem for Prime Minister Boris Johnson as they did Theresa May, deeming a deal not radical enough and too much like remaining in the EU.

The poll shows a key trend we’ve seen over the last few weeks- that Labour has increased its support. This could also extend tomorrow, with the Conservatives’ 28 seat majority reducing even more.

In the short term, sterling would drop if there was a hung parliament. However, some analysts think that if there was a hung parliament which resulted in a further extension and subsequent second referendum which resulted in a remain vote, then the markets might recover.

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