Massive win expected for Tories, sends pounds flying high

The exit poll has been released and it points to a stunning victory for the Conservative party, with a majority of potentially 86 seats. The exit poll is pointing to 368 seats for the Tories, 191 for Labour and a mere 13 seats for the Liberal Democrats. GBP/USD has surged more than 300 pips, which is a huge positive reaction to the news. The FX market is now pricing in the prospect of a smooth Brexit, with the UK leaving the EU with a deal, less extreme economic policies, and the potential for a leftist Labour party to remain in the political wilderness for a generation. 

The surge in the pound is a collective sigh of relief from the FX market, which had started to fear a less clear-cut victory from this election. GBP/USD struggled earlier today as reports suggested that the Conservatives’ lead had narrowed significantly. Now that fears of a hung parliament appear to be incorrect, the pound rally is likely to see GBP/USD test $1.35 and possibly higher in the coming hours. So, what will happen next for the pound? At the time of writing, GBP/USD has surged above $1.35, and made a high of $1.3512 before traders started to book some profit, which pushed GBP/USD down to $1.3460. We have been saying that the pound’s rally could fade even with a Conservative majority, after all our economy remains weak and there is a huge amount of work to be done before we get a trade deal with the EU. However, the ferocity of the GBP surge could see GBP/USD push towards $1.40 in the coming days and weeks, which would be the highest level since May 2018. In the short term, if GBP/USD can make a weekly close above $1.35, then $1.40 could be on the cards before year-end. 

We believe that the election result is positive for the pound for a few reasons: 

1, The eradication of the Labour Party.The FX market is pricing in the prospect of centre-right economic policies for the next five years’, which tends to be a better economic backdrop for UK asset prices. We would expect the FTSE 250, in particular, to rally strongly tomorrow, especially UK utility companies and BT, industries that were under threat from nationalisation from a Labour government. 

2, Brexit. A big win for the Conservatives means that Boris Johnson’s EU exit deal (basically Theresa May’s deal disguised in a blonde wig) will see us leave the EU with a deal before the end of January, which is also pound positive as it completely removes any chance of a no-deal Brexit, which has been kryptonite for the pound since 2016. This will also help to boost the pound and could be a major force that drives GBP higher in the coming days and weeks. 

3, The end of the road for the Brexiteers?Now that Boris Johnson has seemingly won a huge majority for the Conservatives, this will reduce the power of the ERG – the hard right Brexiteer wing of the Conservative party. This could make life a lot easier for Boris Johnson, as it will give the ERG a much smaller footprint in Parliament. It may also help to ease trade deal negotiations with the EU in the coming months, as it could give Johnson the bandwidth to extend the Dec 2020 deadline to get a trade deal done and dusted. This may ameliorate financial markets and reduce fears about the UK struggling to get a trade deal with the EU within such a tight timeframe. 

4, Growth prospects.The UK’s growth prospects may have also picked up on the back of this election result. If the exit poll is correct, then the Tory party may owe their election success to poorer communities in the North and in Wales. To keep their support, the Tories may have to boost public spending significantly, which could impact growth prospects in the coming months and years. Enhanced prospects for growth is pound positive, especially when the UK economy currently looks extremely anaemic.