A hung parliament in the UK’s upcoming general election could prove good news for the pound if it leads to the prospect of a centre-left coalition that pursues a “softer” Brexit, according to strategists at JPMorgan.
Swimming against the tide which has seen investors snap up the pound on the hopes of larger Conservative party majority, the US investment bank thinks a comprehensive Tory victory will have no major impact on the UK’s eventual EU deal and thus holds little upside for sterling.
The pound has gained over 2 per cent since Theresa May called a snap vote for June 8 but slipped back in the past week after a narrowing in the polls.
Following Ms May’s April announcement, markets had bet that the move to effectively push back Britain’s deadline for an EU deal from 2019 to 2020 and the prospect of a bigger Conservative majority would mean a “softer” version of Brexit.
Paul Meggyesi, head of global FX strategy at JPM, thinks a Tory win of whatever size will still see the country leave the single market and customs union.
“Brexit is still likely to feel rather hard insofar as it is liable to circumscribe the UK’s single market access, even if the change in the electoral timetable should temper the tail risk of an outright disorderly Brexit in 2019. We do not expect any real relief rally in sterling on a Conservative victory as Brexit negotiations are due to commence shortly after the election and investors will be wary of the headline risk that will accompany these.”
But of the potential scenarios that could emerge on June 9, the prospect of a hung parliament – where no single party has an overall majority – could hold upside for the pound should it result in a Labour, SNP and Liberal Democrat coalition.
Although hung parliaments have traditionally signaled political uncertainty and led to sell-offs in the pound, “all political developments need to be viewed through a Brexit prism” notes Mr Meggyesi.
Betting markets currently point to just a 10 per cent probability of a hung parliament.
Mr Meggyesi explains:
An argument can be made that a hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties (Labour/Lib Dems/SNP) might actually be GBP positive. FX investors might not exactly embrace various aspects of the Labour party’s domestic policy agenda (the renationalisation of certain sectors, a large fiscal expansion), but they could potentially live with these as the price of a less disruptive Brexit under a government that was more willing to preserve the status quo on free movement of labour and trade (the Lib Dems have also committed to holding a second referendum on the final terms of a Brexit deal).