Sterling hit by polls as traders weigh hung parliament chances
Sterling remains highly susceptible to polls and
specifically exposed to big downside moves on anything other than a solid Tory
majority: last night’s MRP edition from YouGov showed a sizeable narrowing in
the Conservatives’ lead and raised for the first time the possibility of a hung
parliament. The central case remains for a Tory majority of 20-30, but we are
dealing with fine margins for error. Markets for the first time need to worry
about a hung parliament and what that might mean in terms of more uncertainty
over the economy and Brexit.
For traders – it means election night could be
very interesting indeed. We’ll be increasing staffing overnight, looking
particular at the exit poll at 22:00, and preparing for a potentially highly
volatile session, with all that would normally imply in terms of reduced
liquidity for GBP pairs and U.K. assets anyway. Then it’s going to be all hands
on deck on Friday morning as the markets reopen to whatever brave new world the
voters have chosen for us. Spreads may widen out of hours for assets like the
FTSE and GBP crosses, whilst gapping even in FX pairs may occur. A hung
parliament takes back to a 1.27 handle on cable, and could see UK-focused
stocks on the FTSE 250 hit hard.
Having been bid up ahead of the poll’s release, the pound
took fright at the poll data and GBPUSD plunged nearly one big figure
from north of 1.32 to around 1.3110. The pair has pared losses overnight to
The good news is the polling is just about over – the
next major one is the exit poll just after 22:00 on Thursday. This has been
very accurate over the last 25 years.
Yesterday, Wall Street slipped as the tariff deadline
comes into view and markets stand by for the Federal Reserve decision today.
Trade talks appear their usual on-again, off-again self.
Stocks were mixed but generally flagged. The S&P 500
eased back 0.1% but had been positive at times, while the DAX was down 0.3%.
The Stoxx 600 pared losses of 1.1% at one stage to close down 0.3%.
European markets this morning are set to open flat with
the FTSE 100 at 7235 off the back of the pound’s fall since the close
FOMC on tap at 19:00 GMT. The Fed is likely going
signal it’s sticking to its dovish mantra. Whilst no rate cut is anticipated,
we may well see evidence of a noticeable shift in the Fed’s stance:
specifically that it’s now willing to do whatever it takes to stimulate the
economy. Powell has already said it will take a sustained and significant
uplift in inflation to warrant a hike, whilst there’s chatter about essentially
parking the 2% inflation target to let the economy run hot.
The persistent lack of inflation means it has a free hand
to go as low as it likes, it’s only maintaining the mask of prudence by not
cutting more aggressively. Moreover the drag lower from trade, global economic
stress and the move to lower rates in other major economies means this is by
far the path of least resistance. Out go concerns about financial stability or
asset bubbles. The danger now is the Fed is becoming the monetary policy wing
of the White House.