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The kneejerk positive reaction in the British pound to the snap election aligns with our view Sterling has seen its worst. The British pound dropped on news a of a surprise announcement from Theresa May on Tuesday but rebounded when the snap election was called for June 8th. We have been eying potential catalysts for cable (GBPUSD) to break out of its 1.20-1.27 range, and this could be it. The negative reaction in the FTSE 100 is in our view purely currency-related.
We expect the re-election of Theresa May with a larger majority and bigger mandate to take on the EU in Brexit negotiations. A weakened Labour party under Corbyn and a very pro-EU SNP could see a large drop in support, significantly changing the UK political landscape again.
It would appear markets are moving more on the traditional assumption of market-friendly Conservative Party policies than from a Brexit perspective. A snap election probably makes a so-called ‘Hard Brexit’ more likely because of the bigger Tory majority. There would be less chance of a parliamentary vote at the end of the Brexit negotiations overturning the deal. A counter-argument is that the exit of Jeremy Corbyn after a big defeat could actually provide a stronger opposition to Brexit.
The main drawback to a snap election is the potential for additional uncertainty. We believe the election may reduce uncertainty since the Tories would likely run away with it, reinforcing the existing power structure. If the SNP does see a big drop in support, the snap election will also null any chance of InyRef2. Our interpretation is that markets have reluctantly accepted Brexit so a snap election should just help Theresa May’s chances of getting a better deal for the UK.
The UK under Theresa May still looks more stable than Trump’s America or (Le Pen’s / Macron’s ?) France.
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