On 19 April 2017, British Parliament approved Prime Minister Theresa May's proposal to hold snap elections on 8 June 2017. The general election has the potential to impact the pound by providing the Conservative Party with a stronger majority in Parliament, which in turn would give May more support to negotiate with European Union (EU) officials.
Should the Conservative Party secure a larger majority in the House of Commons, May might have an easier time pulling off a so-called hard Brexit, in which the U.K. leaves the EU's single market in order to have complete control over its borders. A hard Brexit could provide the pound with headwinds in the short term, as the U.K.'s exit from the single market could significantly undermine the nation's trade with other countries in Europe and therefore detract from its economy overall.
The alternative would be a soft Brexit, where the U.K. would retain access to the single market but give up control over who can enter its borders. Using this approach, little would change for the nation post-Brexit.
Should the Conservative Party fail to bolster its majority in the snap election, the nation's path going forward could become even more uncertain as May could face obstacles during her Brexit negotiations with EU officials. It is difficult to predict exactly how this uncertainty would affect the British pound.
Why Did May Call For A Snap Election?
May announced her intention to hold this general election on 18 April 2017, and members of the House of Commons gave her proposal overwhelming support, voting 522-to-13 in favour of her plan to hold elections on 8 June 2017. This vote firmly provided May with the two-thirds support she needed under the Fixed-term Parliaments Act to hold a general election before 2020, when the next general election was scheduled to take place.
Technically, the House of Commons has the authority to call general elections that are not part of the regular timeline, which is once every five years under the Fixed-term Parliaments Act. May's call for a snap election contrasted sharply with her previous stance on holding at early election. Since ascending to the role of Prime Minister, she has repeatedly stated that she did not want to hold such an election.
By holding general elections in June, May might be able to obtain a stronger position for her Conservative Party, which currently holds 330 of 650 seats in the House of Commons. Poll data indicates that May's party could gain some seats in the House of Commons during the election, as the opposition Labour Party has suffered very weak support lately, according to opinion polls.
While British polls look favourable for the Conservative Party, the nation's political surveys have a history of being inaccurate, a phenomenon that has been noted by political analysts such as Nate Silver. Polls culling data for U.S. presidential elections have been inaccurate at times, but surveys conducted in the U.K. have had average polling errors that were more than twice as high.
During the 2015 election, for example, members of the British Polling Council underestimated the Conservative vote by more than 4%, a misstep that kicked off an investigation that involved delving into polling data in order to assuage the concerns of dissatisfied voters, politicians and clients.
While the Conservative Party held a 21-point lead in a recent poll, the history of inaccuracies suffered by these surveys could make the outcome of any general election highly uncertain.
The Impact On The British Pound
The British pound reacted favourably when May requested the snap election from Parliament, climbing 2.3% between roughly the close of trading on 17 April 2017 and the same time the following day. As a result, the currency reached its highest point since October 2016.
This uptick was to be expected, according to Dean Turner, economist at UBS Wealth Management. However, he said that only time would tell what fluctuations the global currency markets would experience next. "Market reaction we saw yesterday is probably well judged but we'll have to see what the next 50 days bring," he said.
This rally, which brought the pound to its highest price in six months, followed a period where the currency languished following the 23 June 2016 Brexit referendum, in which British voters opted to leave the EU. After reaching US$1.4787 at roughly the close of trading on 22 June, the pound plummeted more than 10% to US$1.3223 on 27 June.
The pound continued weakening in the coming months, falling to US$1.204 in January, its lowest point since at least 2000. While the currency has recovered, the Federal Reserve Bank of San Francisco published a report expressing concerns that the pound could trade at depressed levels over the long-term.
The currency could consistently trade at lower levels as the U.K.'s departure from the EU impacts the benefits it receives from trade, wrote Pierre-Olivier Gourinchas (professor of economics at the University of California, Berkeley) and Galina Hale (research advisor for the Federal Reserve Bank of San Francisco).
"The pound depreciated sharply immediately following the Brexit vote," they wrote. "This reflects market beliefs that Brexit would lead to a persistent decline in the real value of the pound." In the long-run, the Brexit is a "deglobalisation shock for the U.K. economy," the report's authors continued.
The increased barriers affecting people and trade could reduce the nation's productivity in the years to come, adversely impacting the British economy and therefore impacting the pound.
The Brexit initiative has been fraught with uncertainty, and the impact that the snap election will have on the U.K.'s exit from the EU—and therefore the pound—is largely uncertain. If the Conservative Party secures a stronger majority in the House of Commons, this result could increase the likelihood of a hard Brexit.
A hard exit from the 28-nation consortium could provide the pound with headwinds in the short term, as leaving the single market could significantly undermine British trade with other countries in Europe. Should the Conservative Party fail to bolster its majority in the snap election, the nation's path going forward might become even more uncertain, as May could face obstacles during her Brexit negotiations with EU officials.
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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…