eir Starmer’s Labour Party have opened up a seemingly unassailable lead in the polls, to the point that a Labour majority government is now as close to a foregone conclusion as one could imagine. According to the latest poll of polls from Politico, Labour are on course to obtain 44% of the overall vote, up from 32% in 2019, while support for the Conservatives has plunged to 23%, from 44%.

Bookmaker odds are currently assigning an approximately 90% implied probability of a Labour majority, while analysis from Electoral Calculus sees a 100% chance that Labour emerges as the largest party, and a 98% probability that it obtains more than the 326 seats it needs to form a majority government. Indeed, scenario analysis suggests that the Labour Party will not only achieve a majority but an incredibly comfortable one at that.

According to Electoral Calculus, Labour are on course to obtain a predicted 479 seats, a 308-seat majority, with the Nowcast from Election Maps UK pointing to a similar majority of 272 seats. This rather remarkable swing to the Left, if confirmed on election day, would signify the largest post-war majority in the House of Commons, and a resounding fall from grace for the Tories.

It is also worth remembering that pollsters have also been wrong in the past, and it is not inconceivable that they may be wrong again – the Tories outperformed by between 7 to 8 percentage points at both the 1992 and 2015 elections. We would, however, clearly need to see a very sizable shift in support in the direction of the political right to force the Tories’ best-case scenario of a hung-parliament, which at present appears a remote possibility.

 

How Could the FX Market React to the Election?

 

We would typically say that a shift away from the political status quo would be a bearish development for the domestic currency. Investors do not like uncertainty, and the prospect of a return to a Labour government has been greeted negatively by market participants at previous elections, particularly as investors have viewed the party as the less favourable alternative for the UK economy. This may not be the case this time around, however. A poll conducted by Bloomberg late-last year found that around two-thirds of those surveyed believed Labour to be the more market-friendly alternative, as opposed to just one-third for the Conservatives.

This more positive sentiment towards a Labour government can be attributed to a number of factors. For one, we’ve seen a clear shift towards the political centre in the Labour Party since the last election, and one away from the more extreme left-wing policies advocated by Jeremy Corbyn in 2019. The perceived mishandling of the UK’s finances, particularly following Liz Truss’ mini-budget disaster in September 2022, has also helped rosy the market’s view on a Keir Starmer-led government. Indeed, we are now at a stage whereby a Labour majority, while heavily priced in, would probably be perceived by investors as a mild positive for sterling, even if only due to the avoidance of a dreaded hung parliament.
We see the admittedly unlikely possibility of a hung parliament, whereby Labour wins the most seats but fails to achieve a majority, as somewhat of a tail risk for the pound heading into the vote. The forming of a weak government, whereby the Labour Party needs coalition support in order to govern, would highly likely be a bearish scenario for the UK currency. As mentioned, however, we would need to see a rather marked shift in public opinion in the coming months for this to materialise.