UK snap elections is adding uncertainty to an already busy EU political agenda
(by Arnaud Masset)
Theresa May surprised markets yesterday as she seeks an early general election on June 8. Looking at GBP’s price action, it seems that market participants were quite happy with this decision as the Pound rose more than 2% against the greenback, with GBP/USD hitting 1.2905 on Tuesday afternoon.
This sharp GBP appreciation suggests that PM May’s decision is a good thing for the UK economy. We do not share this optimism as we believe it just increases the uncertainty, particularly in relation to the Brexit negotiations and the UK political landscape.
Indeed, Theresa May has made a risky but necessary gamble by seeking a direct mandate. On the one hand, it gives her the opportunity to strengthen the Tory majority in the House of Commons, which would heighten her negotiation power in the upcoming Brexit negotiations. In addition, it gives her the opportunity to get rid of the 2015 Tory programme.
But on the other hand, it gives a second chance to the British people to speak out about the Brexit decision and also gives an opportunity to other parties to make a comeback. Therefore, we think that the market overly reacted to the announcement, as the only thing that has increased is the level uncertainty.
Today, the House of Commons will take a decision on whether there shall be an early general election. According to most media, it is almost a done deal as the other parties will not miss the chance to try to get more seats.
GBP/USD hasn’t moved this morning (between 1.2809 and 1.2860) as the market is awaiting the result of the vote. We think a “Yes” is priced in, therefore the risk is mostly on the downside as a “No” vote will most likely trigger a GBP sell-off.
In the short-term though, we remain cautious on further Pound gains as investors will be cautious ahead of the election (if it actually takes place). In the longer-term, a Tory victory would definitely bolster the Pound as it will put the country in a better position to negotiate the terms of its divorce with the EU.