The pound strengthened notably against its major currency counterparts on the interbank market this week. In particular, sterling reached a 31-month high versus the euro, a seven-month high against the US dollar, and a 41-month high versus the Australian dollar.
In part, this is because the financial markets are increasingly factoring in the possibility that the Conservative Party will win a majority of MPs, at next Thursday 12th’s UK general election.
For example, according to Britainelects’, the Financial Times’ and the BBC’s “poll of polls”, compiling all the survey results, Prime Minister Boris Johnson’s party stands at 42%, 10% ahead of Jeremy Corbyn’s opposition Labour party, at 32%.
Traditionally, a 10% lead is enough to grant the first-place political party a majority of MPs, to govern effectively. Based on these polls, Electoral Calculus predicts that the Tories may a majority of 42 seats.
In general, the world’s money managers want a single political party to win next week’s election, to finalise Brexit faster, and give confidence to British businesses, for the UK economy in 2020.
However, looking to the six days remaining until the British voting public goes to the ballot boxes, sterling’s value might be affected, if the opinion polls show the race tightening.
In this case, global investors may become nervous about the possibility of a ‘hung’ Parliament, in which no single party wins a majority of seats, and is unable to form a stable government. It’s thought that this could extend the Brexit uncertainty next year.
In particular, were the Tories to fall by 3%, or Labour to gain by 3%, to a 7% lead, we’d enter what’s known as ‘hung’ Parliament territory.
This would raise the risk that a majority of MPs would again decline to pass PM Johnson’s Brexit deal, running up against the UK’s Brexit deadline of January 31st. In this case, we’d again face the possibility of a “No Deal” exit, or have to ask Brussels once more for more time to finalise the UK’s EU exit.
Meanwhile, turning to the UK economy, the services manufacturing, and construction sectors’ performances were better than expected in November, according to watchdog IHS Markit’s latest surveys.
However, even though the UK outperformed forecasts this month, the surveys still point to shrinking economic activity. This could weigh down the UK’s GDP (Gross Domestic Product) growth in Q4 2019, between October and December, and affect sterling.
Next week’s UK economic data includes Monday’s GDP figures for October, forecast at minus 0.1%, and the manufacturing and industrial production statistics for October, both pencilled in at minus 0.2%. If these data arrive above or below forecasts, it may impact sterling, as well as Thursday 12th’s general election.
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