Sterling Rallies with Conservative Majority

Sterling Rallies with Conservative Majority

Sterling rose very sharply overnight as we finally have it- a Conservative majority, and a huge one at that. The pound to euro exchange rate has jumped to 1.2057, with the dollar at 1.3470, up 1.53% and 2.57% respectively at the time of writing. The last few days before the election showed that the Conservatives’ lead had stalled against Labour. However, at 10pm last night the exit polls predicted that the Tories would get 368 seats- an incredible majority.

Pound Spikes at Exit Polls

Throughout the day, the British pound had gone up and down, reflecting the uncertainty of the results of the general election.

When the exit poll was initially released, the British pound jumped. Exit polls are relatively accurate (at least in recent years), but there was still a word of caution from analysts until the final results came through.

The exit poll is based on 144 constituencies in Great Britain, which are typically demographically representative of the population. The 2015 exit poll underestimated the Conservatives’ lead, but was more accurate than the 2015 opinion polls from during the campaign.

In 2017, the exit poll accurately predicted that Theresa May’s party would have the most seats, but was just short of predicting a hung parliament.

The Results

For the Labour Party, it was their worst result since 1935, and the best for the Conservatives since the time of Margaret Thatcher. Boris Johnson’s huge majority has implications for sterling. We saw the pound jump up that sharp cliff edge at the release of the exit polls, and this was because the result gives certainty going forward.

Brexit uncertainty has dominated British politics since the EU referendum in 2016. Under Prime Minister Boris Johnson, the Conservatives are determined to deliver his Brexit deal by the end of January. With these results, the Prime Minister will now be able to do what Theresa May failed to do, as he (in theory) has enough MPs to pass his deal through Parliament.

The Conservatives also have more business-friendly policies, as seen by markets’ reaction to various opinion polls which showed the Labour Party closing the gap with the Conservatives in the final days of the election campaign.

Interestingly, whilst this brings certainty to the markets, it does still show a divide in the UK. The results mean there is more political stability for now, and at least around Brexit. Somewhere to look at is Scotland and Northern Ireland. The SNP made huge gains across Scotland, giving SNP leader Nicola Sturgeon something of a potential mandate to demand a second Scottish independence referendum.

The SNP won 48 seats in Scotland, where they secured 45% of the vote. This was 8% more than in 2017, where it won 35 seats. The SNP took seats from the three main parties- the Conservatives, Labour and the Liberal Democrats. Indeed, the SNP beat out Liberal Democrat leader Jo Swinson by 149 votes, resulting in calls for her to resign. Labour lost all but one of their seats in Scotland.

As Brexit becomes more of a reality, we could see the remain-voting Scotland putting more pressure on Downing Street for another Scottish referendum. If so, we could see more volatility in the markets at the prospect of the break up of the union.

Across the Irish Sea in Northern Ireland, the Conservatives’ partners in previous governments the DUP lost two MPs, which includes its leader in Westminster, Nigel Dodds. The DUP came under scrutiny from voters when they propped up Theresa May’s failed government.

Red Wall Falls

To look at the results in more detail, the Conservatives knocked down the Labour Party’s “red wall” in the north. Boris Johnson’s party took key leave-voting seats in the midlands and northern parts of the country, in seats such as former Prime Minister Tony Blair’s constituency of Sedgfield and nearby Blythe Valley. Both seats have always been Labour, so for them to turn Conservative is staggering.

There will still be some momentum in the pound’s favour over the next few days. Voter volatility has gone, and will (hopefully!) not return for another five years. There are still many questions about the UK’s future relationship with the EU, which is why sterling is still very much below its pre-referendum levels. Depending on how we see the economy fare over the next year, the pound might be able to continue to climb.

Boris Johnson has already said that he aims to move quickly to pass his Brexit deal before Christmas, to allow for the UK to leave the EU in an orderly fashion. Parliament will be working quickly over the next two weeks to put all the relevant legislation in place. For the Labour Party, their future is uncertain. Jeremy Corbyn has said he will not contest another election and has faced many calls to resign by his own MPs- but at the time of writing, remains in place.

For more GBP/EUR news or if you have a currency requirement you can get in touch with me, Tom Holian, directly at teh@currencies.co.uk, or call +44 (0) 1494 360 899 to discuss these factors in more detail.