The polls and the pound

The Pound hit a six-month high against the euro yesterday, after the publication of an expected opinion poll in the United Kingdom, which showed how Prime Minister Boris Johnson is on track to get a comfortable majority in the next December elections. The MRP poll, conducted by YouGov, forecasted that the conservative party would get 359 seats, up by 42, while Labor would drop to 211 seats and the Liberal Democrats would gain one seat.

This would give Johnson a majority of 68 seats, which is enough to have his Brexit agreement approved by the parliament. Although City’s traders are not notoriously in favor of the hard Brexit advocated by Johnson, they fear the situation of another “hung parliament” and the risk of a disorderly departure of London from the European Union. This is why, after the publication of the survey, the pound hit 1.176 against the euro for the first time since May. It also hit a one-week high against the dollar, at 1.2950.

Adam Cole (Royal Bank of Canada), said that the chances of a conservative majority government reached 70% on Betfair, the highest level touched during the election campaign. The probability of a conservative government of any kind is also very high (78%), while the probability of a Labor majority remains negligible (3%). But Cole also recommends caution: it would be a mistake to over-interpret YouGov’s conclusions. Based on the YouGov model, the expected conservative majority would disappear if the Tories advantage over Labor were to drop to around 7% compared to the 11% they have in current results, in line with other surveys. Therefore, with the percentage of Labor votes 1, a hung parliament is still a real possibility.

For this reason, the pound could be put under pressure again over the next days. Yesterday’s sterling gains therefore may be temporary. Despite its recent recovery, in fact, the pound is still below about 10% compared to the June 2016 level, before the Brexit referendum. In any case, despite the tight electoral campaign, the pound is actually in a much stronger position than the euro compared to the beginning of the year, currently up +7%. It is not up to the peak of this year we observed in May of (1,175), but it is not far away.

Many things can still happen over the next two weeks, so we should not expect the pound to remain at current levels. The past elections have seen a very volatile pound and a new Prime Minister generally causes a significant change in its price. So we should prepare for further turbulences.