ECB - no change expected (Video)

Today's Highlights

• UK election - Voting underway

• ECB - no change expected

 

Current Market Overview

Wednesday was a quiet one for all; a lack of data left exchange rates to wander lonely as the proverbial cloud. That was the prelude to a much busier 24 hours, which largely circulates around the UK election. The European Central Bank (ECB) will make an interest rate and Quantitative Easing (QE) announcement today, but no change is forecast. We have already seen German Industrial Production data showing a strong rebound in April. A rise of 0.8% was much better than the revised decline of 0.1% in March and that is all good for the Euro. Traders haven't really reacted, though, until they see the ECB statement.

 

It's all about the UK general election...

That aside, today and tomorrow morning and the early hours of tomorrow are all about Theresa May's unexpected election. The last seven torrid weeks have brought a remarkable amount of ebb and flow in the lead that the Conservatives hold over the other parties and the financial markets are very tense ahead of the results. However, the Pound has strengthened a little in the last 24 hours as traders and investors have prepared themselves for a victory of some sort for the Tories.

It would take a titanic change of fortunes for the Tories for Labour to take office, or even to remove the Tory party's overall majority and, judging from the positioning we are seeing in financial markets, it appears that few believe this is a likely outcome. There must be some nervousness over the size of the Conservative lead and the possibility of an upset, though, because Sterling, which had declined for several weeks, has not rebounded in any meaningful way.

Before the 19th April election confirmation, Sterling had traded up to EUR 1.2050, but was down to USD 1.2512. The confirmation of the election through a Parliamentary vote cause Sterling to rally against the USD and dive against the Euro. The GBP-USD rate sprung up to 1.29 and then on to 1.3050, before dipping again to 1.2750 when Theresa May's lead began to deteriorate.

The GBP-EUR rate dived on the confirmation of the election to EUR 1.1750 and, after a brief rally back to EUR 1.1930, fell more substantially to EUR 1.14, before regaining a cent of strength in the past few days.

 

What next?

"Where next?" I hear you cry. Well, I need three hands for this, because, on the one hand, we might see the Tory party returned with an increased majority. That would vindicate Theresa May's decision to go to the country to strengthen her hand in the upcoming Brexit negotiations. This, it is widely accepted, would see the Pound regain some of its strength against the Euro and even add to Sterling's strength against the US Dollar. A 50% retracement of the losses Sterling suffered against the Euro would see it back at EUR 1.17 and any gains above that would find Euro buyers in the EUR 1.19 area again. That may be enough to stop the Pound breaching €1.20. The USD 1.30 level would be vulnerable at that point and a break to $1.35 cannot be ruled out.

On the other hand, the Conservative majority could be reduced or disappear altogether and that would be viewed as detrimental to Britain's hand in the Brexit negotiations – and could result in a coalition government. The nature and colour scheme of that coalition is anybody's guess, but, in my humble opinion, most things managed by committee tend to sink towards mediocrity and that's a worry for the UK economy and for the Brexit deal. I suspect Sterling would be badly damaged if that appears to be the outcome in the early hours of Friday morning.

On the other hand (this is where the third hand is useful), that loss of overall majority could result in a minority government sporting either blue or red rosettes. That would significantly weaken the ruling party's ability to get anything done at a time when a firm hand on the tiller is a prerequisite to a good Brexit deal. Sterling would be as damaged by this arrangement as it would by a coalition.

At the time of writing, on average, bookies are pricing in a 1/7 chance of an overall Conservative Majority (i.e. you bet £7 and get £1 plus your stake back if you're right). No overall majority is being priced at 6 to 1 and a Labour majority is set at 20 to 1. You can get 1500 to 1 on a Lib Dem majority, but I think that is the definition of an outside bet.

 

Election timeline

The timeline for this next 24 hours is that the voting boxes are sealed at 10pm BST. Between 11pm and 1am, we will start to get some of the results from smaller constituencies; and by 3am the majority of seats will have been declared. We probably won't find out if the former Prime Minister has retained her seat in Maidenhead until 4am or so, but it is likely we will have a very clear picture of the result by 6am.