Sterling climbed to a four-month high against the euro on Tuesday as Theresa May’s call for a snap general election prompted speculation that her move will weaken the hand of members of her party pushing for a hard Brexit.
After initially wobbling against the euro and dollar after the leader of the UK’s Conservative Party made the announcement, sterling soon began to rally. The pound ended European trading up 1 per cent against the euro, at 83.79p, and reached a six-month high against the dollar, of $1.2767, a 1.6 per cent advance for the day.
The decision to call for an election in June is a volte-face for Ms May, who had previously been focusing on the next scheduled vote, in 2020, a year after EU exit talks were due to be completed. She's betting that the Conservatives can secure a larger majority, as a YouGov poll published over the weekend indicated that 44 per cent of voters would back the party in an election, compared with 36.9 per cent in the last vote, in 2015. The poll put the government 21 points ahead of the British Labour Party.
Oliver Harvey and George Saravelos of Deutsche Bank, which has been among the most pessimistic market voices on sterling's prospects since UK voters decided last June to quit the EU, said that the call for a general election on June 8th was a "game changer both for the UK's Brexit negotiations and sterling".
It “makes the deadline to deliver a clean Brexit, without a lengthy transitional arrangement, by 2019 far less pressing, given that no general election will be due the year after,” the Deutsche Bank strategists said. “Second, it will dilute the influence of MPs pushing for hard Brexit, strengthening the government’s political position and allowing earlier compromise over key EU demands for a transitional arrangement.”
Harvey and Saravelos said that Ms May’s chances of securing an orderly and “very lengthy” withdrawal from the EU will be helped by the holding of an election this year. This, in turn, improves the prospects for the UK economy, they said, adding that they were closing out all their negative sterling trades.
Sterling’s value against the euro has ranged between 76p and 91p since the referendum last June, with the volatility affecting exporters, the number of UK tourists coming to the Republic of Ireland, and the profitability of companies that report in euro but generate significant amounts of revenue in the UK.
But the FTSE 100, which is dominated by export-oriented oil and pharmaceutical groups, such as British American Tobacco and Diageo, slumped by 2.5 per cent on Monday, in the biggest drop since last June, to 7,147.50 points. The Iseq index, in Dublin, dipped by 0.3 per cent, to 6,674.84.
"The Conservatives are currently around 20 percentage points ahead of Labour in the opinion polls, so the election would very likely see an increased Tory majority, in turn increasing the likelihood of Brexit, according to Ms May's plans," Chris Hare, an economist at Investec in London, said.
“Although leaving the single market is priced in, one possible upside for sterling markets is the notion of Brexit taking place with less opposition and less confusion. But, clearly, it is early days, and the looming vote could well cause market volatility in the weeks to come.”
Markets are also keeping an eye on the diplomatic standoff between the United States and North Korea, over the latter’s nuclear-weapons programme, and, closer to home, the canvassing before the first round of voting in the French presidential election, on Sunday.
