Sterling rallies to new highs as markets eye big Tory win
The pound leapt to fresh eight-month highs versus the US dollar this morning as polls open in the UK for one of the most crucial general elections in recent memory.
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nvestors are clearly in a confident mood that Boris Johnson’s Conservative Party will secure a comfortable majority victory at today’s vote, which should pave the way for his Brexit bill to pass before the end of January deadline. Unlike the 2017 election, the latest opinion polls have not shown signs of a significant narrowing between the Tories and Labour. The bookmaker odds are also continuing to give Johnson’s party around an 80% chance of obtaining a majority, although the polls have, of course, proved way off the mark in the not too distant past.

We don’t expect too many meaningful moves in either direction until later on this evening, with most investors already positioned going into this evening. Polls will close at 10pm this evening, with the first exit polls to follow soon after. Given the accuracy of these polls at the last election, we would expect the first significant bout of volatility in the pound around this time.

The results from the first few constituencies are then expected to filter through from around midnight. As mentioned last week, the estimated timing for the votes to be counted (according to the Press Association) are as follows:

  • 33% of votes counted by 2:30AM

  • 50% by 3:00AM

  • 80% by 4:00AM

  • 90% by 4:45AM

A good gauge of investors expectations for this evening is the level of overnight volatility in the GBP/USD cross, which has surged to its highest level since the EU referendum itself (Figure 1).

Figure 1: GBP/USD Overnight Volatility (Jan ‘19 - Dec ‘19)

Source: Thomson Reuters Datastream Date: 12/12/2019
While we do continue to expect a relatively comfortable majority victory for the Conservative Party, the outcome may prove too close for comfort for Johnson. The main concern for the Tories will, of course, be the youth vote. 6.2 million new voters registered to vote in the 100 days prior to the registration deadline (2 million more than in 2017). Approximately 50% are said to be under 25 (usually 25-33%), with over half of this age demographic said to be voting Labour this time around.

Tactical voting in favour of Labour among existing Lib Dem, Greens and Plaid Cymru voters keen to avoid Brexit also presents a risk to the Tories. The Conservatives are likely to have already tapped into most of the Leave support among Brexit Party voters, with the party's share of the vote now down at around 3% from closer to 20% in mid-September.

Regardless of the outcome, we expect some rather knee-jerk and unpredictable moves in sterling right through the night and into the early hours.

Dollar slides as Fed lowers interest rate projections



Elsewhere in the markets, the US dollar lost ground against its major peers yesterday evening following the release of the latest Federal Reserve policy announcement.

EUR/USD shed around half a percent of its value after Fed Chair Powell indicated that rates were unlikely to be hiked again until 2021 at the earliest. Powell continued to talk up the recent performance of the US economy, saying that the economic outlook ‘remains a favourable one’. He did, however, reiterate that the bank would need to see a ‘persistent’ jump in inflation before it deems rate hikes as likely. In fact, only four members on the FOMC now see higher rates in 2020, down from nine at the September meeting (Figure 2). This is in line with our expectations that the FOMC is likely to hold rates steady for the foreseeable future before gradually hiking rates again in 2021.

Figure 2: FOMC December Dot Plot


Source: Federal Reserve Date: 12/12/2019

ECB set to hold policy steady this afternoon



In a very hectic day in the markets, the European Central Bank will also be announcing its latest policy decision this afternoon.

We expect new ECB chief Christine Lagarde to mostly stick to the existing script, talking up the need for fiscal stimulus and reiterating that policy could be eased further, if required. As this is Lagarde’s first policy meeting as new ECB chief, she is highly unlikely to announce any new easing measures. Any comments that talk up the recent stabilisation in Euro Area data may further fuel the rally witnessed in the common currency in the past 24 hours.
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