Rally on the pound - possible scenarios. Why is the time of the Islanders' decision becoming a time of investor uncertainty?

Citizens of the Kingdom will vote in early parliamentary elections to break the Brexit deadlock. Prime Minister Boris Johnson has promised that if his party wins, Brexit will occur at the end of next month. However, many observers do not believe in such a scenario after losing the fight, Prime Minister May. GBP is highly sensitive to any reports about election results polls. This is because it depends on how the British vote, whether we will finally see the end of the Brexit saga.

“The pound is lower as investors who have been buying the currency in recent days in the hope of an easy Tory win now have doubts. However, not all is lost. Boris Johnson might even be pleased with the poll as it could mobilize Conservative voters who were not going to the polls, hoping for a sure win from BoJo. The pound rally may come back, further supported by the unwinding of hedging deals, for which there has been fresh demand since yesterday " - explains Konrad Białas, chief economist of TMS Brokers.

Pound sensitive to reports of polls

Sterling in relation to the US dollar is on a rising tide since the beginning of September. The market has already managed to strongly discount the victory of the Conservative Party, headed by Boris Johnson. This does not mean, however, that after the results are announced, the pound will not gain. Tuesday's poll by YouGov showed Tory advantage, which, however, has shrunk compared to the previous study. Recent estimates indicate that Johnson may expect 28 to have an advantage. Previously it was as much as 68. Nervousness on the market is justified, because YouGov is accustomed to providing predictions with a high degree of accuracy. You can see that there is a slight uncertainty on the pound. Lower levels GBP / USD they can, however, be used by investors as attractive, which may result in another growth impulse on the currency pair.

What does Boris Johnson's win mean for the market?

Obtaining an independent majority by conservatives (an advantage of at least 7 percentage points over Labor) will have several consequences. First of all, Boris Johnson will become Prime Minister again in the Islands. Secondly, the Brexit agreement will be supported by all candidates from the Conservative Party. In this way, the new-old prime minister will be able to operate more efficiently, which increases the chance of faster ratification of the agreement. Then the date 31 January 2020 year would go down in history as the official day of Great Britain's exit from the European Union. A months-long saga would be theoretically completed. The effect of this could be the proverbial rally of relief on the pound market, i.e. further dynamic currency appreciation.
The transition period, defined as the time until the end of the 2020 year, is likely to be extended. Brussels and London will need more time to communicate and establish mutual relations. Negotiations of this type are a process that can take several years.

What if conservatives do not get an independent majority?

Failure to win the majority implies a fundamental issue: Jonson's party is unlikely to be able to fulfill the Brexit promise. Conservatives are not even able to form a coalition with any grouping that will gain access to the House of Commons. It would be possible that the Labor Party would agree with smaller groups: the Scottish National Party and Liberal Democrats (LD). As a result, a broad coalition of opposition could begin to rule.

Be sure to read: British parliamentary elections and their impact on the pound

Both smaller parties in the Brexit case support the idea of ​​Corbyn (Labor Party leader) to renegotiate the agreement and re-issue a referendum. The result would be a postponement of the British exit date. This scenario will be negative for the pound in the short term, because the Brexit saga will lengthen. In the long horizon, however, the pound may gain, because the new referendum is also a probability that Britain will not leave the EU at all.

Another negative scenario for the pound

Another possible scenario is one in which no grouping obtains the majority of 320 votes necessary to form a government. The DUP party (North Irish Unionists, conservative coalition in the previous term) is reluctant to cooperate with Boris Johnson, unfavorably regarding the terms of the agreement he negotiated. This party will also not enter into an agreement with Corbyn, due to the fact that the leader of the Labor Party is associated with Irish republicans.

The TMS expert summarizes:

“Such a course of events would force another election to be called and, consequently, the Brexit date would be postponed. The market would certainly not find this information positive. The outflow of capital from GBP and the depreciation of the pound would be a natural consequence of this. "

Source: TMS Brokers, Press release