Good morning,
GBPUSD at 2 week high as polls open
Super Thursday, Thunderous Thursday, the Thursday to end all Thursdays is here and while we will be waiting for more than 12 hours to get an initial read of the UK election, sterling is already beginning to lift itself higher on the basis of widespread predictions of a Tory win. GBPUSD finds itself at a two week high this morning.
Last night the opinion polls provided a mixed picture: two polls showing a narrowing Conservative lead, two had it staying the same and two showed it as widening. With that in mind, and given our analysis of the polling, results and price action in previous political events, as well as current betting odds, we see three scenarios unfolding on tonight.
These are, in order of probability:
1. A strong Conservative majority (i.e. more seats than before the election was called) at ~65% probability
2. A diminished Conservative majority (i.e. fewer seats than before the elections was called) at ~25% probability
3. A hung parliament at ~10% probability
What might happen to sterling?
Whatever the outcome, we think that GBP is likely to react more strongly against the euro than against the US dollar given the ramifications of the outcome for future Brexit negotiations.
Under our central scenario, we think sterling could pop higher by a per cent, as long as exit polls due at 10pm show a Conservative majority of above 70 seats. Anything less and we think GBP could be pushed lower by disappointed bulls. At the moment some of that per cent gain is already coming into sterling pairs so the reaction at 10pm may be quite muted.
A hung parliament could prompt as much as a 2-4% decline in GBP across the board; sterling slipped by 2% following the 2010 announcement of a hung parliament and we would expect a reaction on Thursday to be amplified by Brexit concerns and limited expectation that a lasting coalition could be formed.
Labour need to win ~90 seats more than they did in 2015 to win a majority and while this is not out of the realms of possibility, we see it as a very low probability event. We might expect an initial slip in sterling of around 1% were this to take place.
Too early for the ECB to offer tapering lanugage
The European Central Bank meeting today will see the central bank once again weigh up the positives of the growth picture in the Eurozone versus the negatives of the inflation picture. We think that today’s meeting is too soon for the European Central Bank to be extolling the virtues of a tapering of its asset purchase plan that has been in place now for three years. Economic projections released as part of the meeting will likely see a cessation in the upwards pressure on prices and any move towards the 2% inflation target as more of a crawl than a sprint.
As we noted on Tuesday, like the Fed, Bank of England, Bank of Japan and Riksbank, the European Central Bank will likely err on the side of caution as to how quickly rates will rise and accommodation will fall given none of them, apart from with some fringe elements of the market, have lost credibility whilst also avoiding recessions in their respective policy arenas.
Trump’s FBI conduct in focus
James Comey will take his testimony to the Senate today. The intial transcript released yesterday suggested that Trump pressured him for loyalty, as well as asking for leniency with regards to Michael Flynn, his National Security Advisor who was forced to resign after lying about contact with members of the Russian administration.
Timings for the day
The ECB will announce its policy decision at 12.45 BST before its press conference and policy statement at 1.30pm. Former FBI Director Comey will begin his testimony at 3pm while we in the UK will have to wait until 10pm tonight for the first exit poll and around 00.30 for the first results of the general election to be announced.
Have a great day.