Business Maverick

Business Maverick

Pound Surges Most in 2 1/2 Years as Election Results Filter In

Voters queue outside a polling station in London, U.K., on Thursday, Dec. 12, 2019. . Photographer: Chris Ratcliffe/Bloomberg

The pound jumped by the most since 2017 on signs Boris Johnson’s Conservative Party was on course to secure a strong majority in the U.K. election, raising hopes of an end to the Brexit deadlock.

The surge took sterling to its highest level since May 2018 against the dollar and the strongest rate versus the euro since the aftermath of the referendum on European Union membership. An exit poll undertaken by the BBC and other broadcasters said the party was on course to win 368 seats in the House of Commons, a majority of 86, and early results supported the findings.
The pound hits highest versus dollar since May 2018

“The numbers that people expected were 330 maybe 350 so to see 368 on the screen is incredible,” said Jordan Rochester, a currency strategist at Nomura International Plc in London, speaking to Bloomberg Television. “The pound’s at $1.34, I think it can go to $1.3450, $1.35. Unless the exit poll is wrong, it can stay there.”

The sizable majority would allow Johnson to push his Brexit deal through Parliament by the end of January and move on to trade talks with the European Union, without having to rely on the votes of the pro-Brexit caucus known as the European Research Group. It may bring an end to more than a year of parliamentary gridlock that held back investment and contributed to an economic slowdown.

Sterling jumped as much as 2.7% to $1.3514, its biggest intra-day gain since April 2017, and was 2.2% higher at $1.3452 at 12:40 a.m. London time. It rallied by 1.8% to 83.05 pence per euro, touching 82.80 pence, the strongest level since July 2016.

Nomura’s Rochester messaged his clients and told them “to go home folks, pop open a bottle of wine, get a night’s sleep,” he said.

Sterling is on course for best day vs dollar since Jan. 2017

The exit poll exceeded predictions for a 28 seat majority projected by YouGov earlier this week. While that doesn’t guarantee the final result, such surveys have generally been reliable and in 2017 it accurately predicted that then Prime Minister Theresa May would lose her majority.

Investors prefer the prospect of a Conservative government that can push through a Brexit accord and move on to the next phase of talks, with Johnson promising all of his lawmakers will back his deal. They were skeptical of Labour leader Jeremy Corbyn’s plans to overhaul the economy through increased spending and nationalizing key industries.

What Bloomberg’s Economists say:

Assuming the poll is accurate, Johnson’s Withdrawal Agreement is certain to get through parliament by the current Brexit deadline of Jan. 31. That would reduce some of the uncertainty that has plagued the economy since the country voted to leave the EU in June 2016, and prompt a bounce in business investment. Still, the lift would be modest because of a lack of clarity about the shape of any future trade deal between the U.K. and EU.

— Bloomberg economist Dan Hanson

A clearer path to Brexit would remove a key risk factor hanging over global markets. It follows President Donald Trump’s backing for an initial trade deal with China and a clearer outlook for monetary policy at the Federal Reserve and the European Central Bank after their December meetings. Global stocks are trading at a record high and investors are moving out of havens including government bonds and the Japanese yen. The euro traded at the strongest level versus the dollar since August.

“Johnson’s win means he can push through Brexit and into the next phase — to me this signals that the worst of Europe’s malaise is behind us,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management in Philadelphia. “The results take away a key risk in markets and while there’s still issues with U.S.-China trade, this U.K. election is one of the big ones. Long sterling is our biggest currency position outright.” The firm has a target of $1.50.

Get Brexit Done

Though a Conservative majority is seen as the most market-friendly outcome, not everyone expects it to lead to a sustained sterling rally. Johnson pledged to “get Brexit done” by the end of January during the campaign, but in practice the deadline will signal the start of trade talks which could prove even more complicated than the process of negotiating Britain’s exit from the bloc.

“A strong majority means the withdrawal bill gets through in January and it also means the Prime Minister is less reliant on the ERG in trade negotiations next year,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “I would still be wary of chasing the pound higher at these levels though.”

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