Thought of the day
19.04 - Could a UK election revive sterling?
Accustomed to long breaks between elections, UK voters may well be visiting polling stations for the third time in as many years. While an overdose of elections is often unsettling for currencies, markets are assuming that this proposed contest on 8 June – announced on 18 April by Prime Minister Theresa May and subject to parliamentary vote on 19 April – will lead to greater political stability. The news produced sterling's biggest one-day gain versus the US dollar since January, when May relieved markets with a balanced Brexit speech. Meanwhile, the overseas-focused FTSE 100 Index suffered its largest one-day loss (–2.5%) since the aftermath of the Brexit vote on 27 June last year.
And sterling's rally looks like more than a one-day blip. This June's election could help stem the slide in the currency, which had lost around 15% of its value versus the US currency since the Brexit vote. The FT poll tracker currently gives May's Conservative Party 43% of the vote, an imposing lead over Labour at 25%.
An outcome along these lines would significantly boost the Conservative majority. It could also dilute the influence of Conservative Brexit hardliners, who are not opposed to the most disruptive exit path from the EU. And a bigger Conservative majority should give May greater leeway to compromise with her European counterparts around an interim agreement. That, in turn, raises the chances of a longer handover period after the UK formally leaves the EU in 2019, a potential source of stability for markets.
At the UBS Chief Investment Office (CIO), we expect the pound to rise to 1.36 versus the US dollar over the coming 12 months, up from 1.28 at present, but still well below the 5-year average of USD 1.51.