On 30 October 2019, British Parliament approved a general election that was scheduled to take place 12 December 2019. This event could impact the pound's price because it could grant either the Labour or Conservative Party a majority, making it easier for the U.K. lawmakers to finalise Brexit with the European Union (EU).
If Prime Minister Boris Johnson's Conservative Party attains a majority in Parliament as a result of the election, he may find it easier to approve a Brexit deal. After negotiating a deal that is acceptable to Parliament, he could then work with the other key parties representing the EU.
The pound may benefit, at least in the short term, if the U.K. and EU avoid a no-deal Brexit. Such an agreement would produce modest gains in the pound, economists at investment bank Goldman Sachs predicted in September.
If the U.K. is unable to work out an agreement with EU authorities, this could easily fuel losses for the pound. Goldman Sachs also weighed in on this potential scenario, claiming in a note released in October that a no-deal Brexit would cause the currency to lose value.
If the U.K. fails to work out a deal with EU authorities, it would create an uncertain situation for the pound. There are multiple ways that efforts to create a Brexit deal could fall short. For any agreement to be put in place, it must receive approval from both British Parliament and the European Parliament.
Why Did Johnson Call For An Early Election?
Johnson repeatedly pushed to hold a general election in an effort to secure a majority for his Conservative Party. By obtaining this support, Johnson hopes he will have the clout needed to pass his Brexit Withdrawal Agreement.
The House of Lords approved legislation for this general election on 30 October 2019, after it had received the necessary backing of the House of Commons. Before extending this approval, Members of Parliament (MPs) rejected the legislation to set up a pre-Christmas general election three separate times. The Labour Party had originally refused to back a general election, but changed its position, giving the proposed balloting a green light.
Before this legislation was approved, the U.K. was not scheduled to have another general election until May 2022. By approving the pre-Christmas election, Parliament moved this balloting forward considerably.
If this election produces an absolute majority for either the Conservative or Labour Party, it should allow the U.K. to move on with Brexit.
If Johnson's Conservative Party ends up with a majority after this election, he will likely have the political backing he needs to get his proposed Brexit deal approved by Parliament in January 2020. This could potentially clear the way for the country to leave the EU at the end of that month.
Based on the latest polls at the time of this writing, which were conducted on 15 November 2019, the Conservative Party was ahead. According to this survey, which was conducted by Panelbase, the Conservatives had a 13-point lead over the Labour Party (43% to 30%).
The Panelbase survey was not the only one that looked favourable for Johnson's Conservative Party. Britain Elects, which aggregates polls, indicated in October that the party had a 10% lead over the Labour Party.
Further, Johnson decided in October to let 10 Conservatives back into his party, after they were kicked out the month before for supporting legislation that was intended to prevent a no-deal Brexit. This move gave them the ability to seek re-election as members of that party.
Other MPs that were kicked out in October could also potentially rejoin the Conservative Party. Johnson's decision to allow exiled MPs back into his party, and his openness to add the other lawmakers who left, could bolster Conservative numbers in Parliament and give him a better chance of achieving a majority.
In regards to the December election's results, some political observers have speculated that Johnson himself may lose his seat in Parliament. However, a Conservative prime minister has not lost their seat in Parliament since 1906.
Even if Johnson did lose his seat, he could potentially continue to serve as prime minister. However, he would need to make himself a peer of the realm in order for this happen.
The Impact On The British Pound
The simple fact that the U.K. decided to hold a general election before its regularly scheduled time could make the pound's price movements more unpredictable, analysts have noted. "The prospect of a general election would certainly introduce more uncertainty for the pound going forward," Lee Hardman, a currency analyst at MUFG, told The Financial Times.
"Currency markets as a rule do not like political uncertainty," said Jane Foley, who works for Dutch financial services firm Rabobank as a senior currency strategist. "What would appease investors is if legislation that would prevent no deal was passed."
Expectations surrounding whether the U.K. works out an agreement with the EU could have a significant impact on the pound's value. The currency will receive tailwinds from anything that reduces the chances of a no-deal Brexit, while any variables that increase the odds of such an exit will provide headwinds for the currency.
Many expect that if the Conservative Party ends up with a majority following the general election, lawmakers will be able to work out an agreement so they can move forward with Brexit, according to Steve Miley, head analyst for Market Chartist. Such an outcome will likely provide gains for the pound. However, if the Conservative Party fails to achieve a majority in Parliament, it could easily create downside for the pound, wrote Miley. As a result, Miley noted that the currency could suffer losses in the short-term.
Regardless of how the December election turns out, a no-deal Brexit is still a possibility. The U.K. Parliament may fail to agree with the EU, resulting in a logjam. "If you think [about] political uncertainty being bad, the worst outcome is a hard Brexit," said Foley, because no one knows exactly how a situation like that would turn out.
If lawmakers can secure a Brexit deal, the pound could see further upsides, according to a team of strategists at Goldman Sachs.
Only time will tell how the December general election will turn out and the impact it will have on the pound. If one party achieves a majority in Parliament, it could give U.K. lawmakers the unity they need to approve terms for the nation to leave the EU. Such a development could easily provide an upside for the pound.
However, if the December election fails to result in a majority for any party, it will make the situation even more uncertain by undermining the ability to U.K. lawmakers to form an effective coalition and negotiate a deal. Further, even if U.K. lawmakers are able to put a deal together, that doesn't mean that members of the EU Parliament will accept it.
If the various stakeholders are unable to put a deal together, it will create significant uncertainty that will then likely undermine the value of the pound.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…