pinion polls have narrowed considerably since the Conservative Party opened up a 20 point lead over Labour back in mid-April, the largest lead it has had under the existing government’s tenure. Opinion surveys from YouGov and Survation in the past week or so now give the Tories a very slender advantage of less than 4%, although others estimate this gap at around 10%. This is a significant departure from the landslide victory they were predicting when Theresa May called the election less than two months ago.

With the margin of victory, and possibly even the actual outcome itself, now far from guaranteed, Sterling is likely to be especially volatile in the days leading up to the vote and as the results begin filtering through during the early hours of Friday morning.

All Sterling moves below are against both the Euro and the US dollar. We expect the outcome of the election to have no material impact on the EURUSD exchange rate.

How will Sterling react to the election outcome?

SCENARIO 1: A comfortable victory for the Tories

(350 seats)

Still the most likely outcome is for the Tories to extend their existing position as Britain’s largest party, beyond the 330 seats they obtained in 2015. Online prediction website PredictIt is currently giving the party around a 60% chance of obtaining more than 350 seats. A large majority would likely strengthen Theresa May’s hand in the Brexit negotiations and reduce the likelihood of a Brexit deal being blocked by MPs.

Investors would breathe a sigh of relief off the back of the news and we’d expect to see a Sterling rally in the order of around 1-2% from the clearing out of uncertainty, dependent on the size victory.

PredictIt Odds: 60%
GBP reaction: 1-2%

SCENARIO 2: Conservatives sneak by in tight contest

(325-350 seats)

This would undoubtedly be a disappointment to Theresa May who would have been confident of securing a much firmer footing within her own party when she called the election in April. A very slender majority victory would bring her leadership into question and there would be a reasonable chance of a leadership change while the Brexit negotiations are ongoing. This would undoubtedly concern investors.

We would expect to see a moderate sell-off in the Pound, again dependant on the magnitude of the overall Conservative majority.

PredictIt Odds: Approximately 25%
GBP reaction: -1-2%

SCENARIO 3: A hung parliament

A Conservative majority is now by no means a done deal and we could conceivably face the situation of a hung parliament. Theresa May would be under heavy pressure to resign as Conservative leader and the Tories may have to try and secure a minority government under fresh leadership. A Labour-SNP-Lib Dem coalition is also far from out of the question, albeit unlikely.

PredictIt Odds: Approximately 12%
GBP reaction: -2-4%

SCENARIO 4: Labour victory

Financial markets do not like uncertainty and a change in leadership would undoubtedly lead to an abrupt depreciation in Sterling against every other world currency. Political uncertainty and the likelihood of an even more drawn out Brexit process would severely weigh on sentiment towards the UK currency and we would have no alternative but to revise downwards our forecasts for the Pound.

However, this still remains highly unlikely. An equally-weighted poll of polls over the past fortnight still has Labour lagging around 7% shy at 43% to 36% and we would need to see a fairly violent swing in the next few days for Jeremy Corbyn’s party to register an unlikely majority victory.

Bookmaker Odds: 3%
GBP reaction: An initial sell-off in excess of 5%, followed by a retracing of around half of its losses.

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