GBP and UK election: Asymmetric sterling reaction – ING

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GBP price action after the election will be asymmetric; less pronounced gains on a market-friendly outcome vs more meaningful losses on a non-market friendly outcome, explained Petr Krpata, Chief EMEA FX and IR Strategist at ING.

Key Quotes:

“A large Conservative party majority would be perceived as an expected market-friendly outcome and lead to additional sterling gains. A Conservative Party majority of say 30-40 plus would be more positive as it would reduce potential uncertainty around a possible extent of the transition period. EUR/GBP to reach 0.82 and GBP/USD 1.35.”

“A smaller Conservative majority would initially lead to GBP gains, too (to 0.83), yet the scale of GBP strength is likely to be marginally more limited. While the Withdrawal Agreement would very likely be passed by the end-January 2020, the question of a hard Brexit might return around mid-year if eurosceptics in the European Research Group oppose an extension to the transition period beyond the end of 2020 (which would, in turn, suggest there is no Conservative Party majority for an extension). Still, as this is an issue for 2020, it is unlikely to prevent initial GBP gains.”

“A hung parliament would lead to a full pricing out of the GBP Brexit resolution premium (which is currently worth more than 2% based on our estimates), a rebuilding of sterling speculative shorts and GBP/USD likely dropping to 1.26 (and EUR/GBP rising 0.8700 this week).”

“An outcome consistent with a fragile Labour-led minority government would, in our view, be the most negative of the most probable election outcomes. This reflects (a) the market not pricing such a scenario; (b) initial market concerns about nationalisation and fiscal concerns (i.e. a material rise in borrowing needs as implied by the Labour manifesto). While the prospects of a second referendum could eventually help to stabilise GBP (as well as lower the probability that Labour policies would be introduced in full under a minority Labour-led government) the initial reaction would likely be GBP negative.”

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