At the beginning of 2017, we wrote a special report about the upcoming Elections throughout Europe in one of our Opening Articles in the Platinum Trading Floor which is our members only access page.
At the time, there was still a question mark whether the UK would trigger Article 50 of the Lisbon Treaty or not and when it would be done. We had a rough idea it would take place in March, but there was still a lot of uncertainty around the subject.
What has this report got to do with the UK triggering article 50?
Well, at the report we discussed the Elections’ calendar for Europe this year and at the beginning of 2018, how it could affect our trading and the risks Europe faced if some results followed the example of Brexit and the US Elections last year.
Fast forward to today and we have cleared some of those events and surprisingly we have added some others. We now know that the UK has formally started the process of exiting the EU having triggered Article 50 at the end of March and also that the French have opted for a president who is strongly in favour of the EU project.
UK General Elections
Here we get to our point in this article. At the beginning of the year, the UK General Elections was not an event in the calendar. We knew about Article 50, the French elections, the German elections and the Dutch elections, but we couldn’t Forsee the UK having a general election.
Unfortunately, before we can discuss the UK elections, we will have to touch a subject which may be already driving you mad, particularly if you live in the UK. If you thought about BREXIT, you guessed it correctly! We are going to discuss that infamous subject.
BREXIT and the triggering of article 50
We promise we will try to be very brief about this particular subject. However, if you intend to be a trader and trade with finesse, you have to be tuned to what is happening fundamentally in the market and understand the possible outcomes of an event such as the UK election which is going to be the next big fundamental event in our calendar this year.
Let’s review Brexit in a timeline:
June 23, 2016: The U.K. holds a referendum on whether to leave the European Union.
June 24, 2016: The referendum result is announced, with 52 percent of voters choosing to leave the EU. David Cameron resigns as prime minister and the pound plunges to a 3-decade low. BOE announces it is ready to support the financial system.
July 13, 2016: Theresa May becomes Prime Minister, predicting Britain will “forge a bold new positive role for ourselves in the world.”
August 4, 2016: The Bank of England cuts its benchmark interest rate to a record low at 0.25 percent and expands its bond-buying program.
October 2, 2016: Prime Minister says she will trigger article 50 by the end of March.
October 7, 2016: The pound plunges more than 6 percent in two minutes during the thin liquidity of the Asian session to its lowest level in 31 years in what became known as the flash crash.
October 13, 2016: European Union President Donald Tusk says it will be “hard Brexit” or “no Brexit”.
November 3, 2016: The High Court rules U.K. must hold a vote in Parliament before starting the Brexit process.
January 24, 2017: The Supreme Court Rules the Prime Minister must seek the permission of Parliament before starting the countdown to Brexit.
March 29, 2017: At around 1:20 p.m. in Brussels, Tim Barrow hands Donald Tusk the letter which begins two years of talks. Theresa May tells lawmakers in London that “this is a historic moment from which there can be no turning back.”
April 18, 2017: After encountering all sorts of difficulties in the Brexit process, Prime Minister calls for UK General Elections for the 8th June 2017.
Why has the Prime Minister called for A General Election?
The reason the current UK Prime Minister gave for the sudden call for elections was that she needed to strengthen her hand in Brexit negotiations with European leaders. She had fears that Labour, the SNP and other opposition parties – and members of the House of Lords – would try to block and frustrate her strategy, making the country look even more divided to other EU leaders and making her government seem weak.
The Prime Minister inherited a tiny Commons majority from David Cameron, meaning that it only takes a few Conservative MPs to side with the opposition to vote down the government’s plans. The Conservatives began the election campaign with a big lead over Labour in the opinion polls.
How the UK election may affect the Pound.
In the past, on other UK general election campaigns, Sterling has risen when the Conservatives have been doing well in the polls and looked on course to win a big majority.
Since the Prime Minister called a snap election on April 18, her party’s poll lead has strengthened and sterling has gone up by 2.9% to just below $1.30.
There are Brexit-related reasons for the rise, mainly the receding prospect of yet another election in 2020, the year after Britain supposedly leaves the EU.
If there had been an election that year, Theresa May could have hardened her position on Brexit, so as not to go to the polls with an unpopular deal.
But putting Brexit aside, there appears to be a correlation between Sterling’s fate and Conservative polling before elections. The British Pound tends to perform well when the Tories do relatively well in public opinion polls.
An example of that was when Tony Blair stood firm to beat John Major tightly in the 1997 campaign. The UK’s currency rose when the polls showed that Labour’s considerable lead was shrinking.
One argument goes that sterling has appreciated in value recently because investors like the idea that a bigger Conservative majority would allow Theresa May to override Brexit sceptics in her party.
While the pound may like the idea of a Conservative government, an actual victory does not mean it will happy for long.
When the election is over, other factors quickly reaffirm themselves. In this case, the obvious one is the infamous Brexit and the deal that the UK and EU eventually reach. One can clearly confirm that the Pound’s performance in the run-up to an election doesn’t reflect what happens to it in the afterwards maths.
The Pound’s Pre-Election Rally
As a conclusion, we then can affirm that a large majority for Theresa May in Parliament, is no guarantee that the pound will continue its recent rally against the US Dollar.
Investors could, therefore, understand that sterling will stay strong during the rest of the campaign, in particular, if Prime Minister’s victory continues to look assured, but then dip on the morning of the result and in the week after the election in the old-fashioned way of buy the rumours sell the news move.
The Forecasted Impact of Each Party on the Pound
Conservative = Up
Labour = Down
Liberal Democrat = Down
SNP = Down
EUR/GBP – UK Elections special chart:
Important levels to keep an eye on EUR/GBP
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