The Election Puts Sterling On A Bumpy Ride

Journalists like to use certain words. A clumsy political mistake, in news-speak, is a “gaffe”. An eye-catching opinion poll is “rogue”. A currency that goes up and down a lot “whipsaws”. Well, sterling has certainly whipsawed lately, after successive gaffes and a series of rogue polls.

The pound remains more than 10pc down against the dollar since last June’s EU referendum. It’s up almost 5pc, though, since the start of 2017 – and rallied in mid-April, to a six-month high, after Theresa May called a snap election. Investors bought sterling on the hope an improvement on the Tories’ 17-seat Commons majority would strength the Prime Minister’s hand during the Brexit negotiations.

Since mid-May, though, the pound has been – ahem, here’s more “journalese” – on a rollercoaster ride. That’s when polls began suggesting the Conservative lead over Labour was shrinking, down from over 20 points to, in some cases, low single figures. An uncertain campaign, a manifesto that fell flat provoking a social policy U-turn Downing Street then denied, made May look not so “strong and stable”. Jeremy Corbyn, meanwhile, kept fed voters imaginary fruits from his magic-money tree.

When this campaign started, Labour’s “unelectable” leader and Ukip defections were supposed to deliver May her party’s first triple-digit majority since Thatcher. Now, the Prime Minister would be happy with anything over 50 – with some respected pollsters even predicting a “hung” Parliament, the Tory majority entirely gone.

With so much uncertainty swirling, the pound is volatile, on thin trading volumes. Over the last week, it has zig-zagged within a range below $1.28 to almost $1.30, driven mostly by headline-grabbing polls. Sterling recovered from a sharp fall on Wednesday, for instance, as the FTSE-100 index of leading shares closed at a near-record high. It was hammered again the next day, though, as yet another poll gave May just a three-point lead. No matter that new data showed British manufacturing chalking-up its second-fastest monthly growth in three years. Currency markets cared more about a poll.

Investors generally react positively to the prospect of a Conservative government – on the assumption (by no means always warranted) that Tory ministers borrow less than their Labour counterparts, are more business-friendly and less likely to ruin the economy. It’s not surprising, then, that when May called an election, attempting to convert a large approval rating into a tighter grasp on power, the pound soared.

What’s interesting, though, is that market sentiment towards Brexit seems to be shifting. When the UK voted to leave the EU last summer, the pound fell. When Theresa May said in January that she wanted the UK outside both the single market and the customs union, sterling dropped once more. When the government later lost a court case, though, and had to ask for Parliament’s approval before triggering the two-year Article 50 process to actually leave the EU, the pound rose. And when the House of Lords’ ultra-Remain lobby revolted, showing signs of wanting to stop Brexit altogether, again sterling went up.

Something has now changed, though. When May looks stronger – which not only makes Brexit more inevitable, but her stated version of “no messing about” Brexit – the pound gets stronger too. It may be partly because the market is petrified of Corbyn’s “coalition of chaos” and Labour’s rather tenuous graph of maths. Alternatively, investors may also be collectively concluding that it now makes most sense for the UK economy if we just get on with Brexit. If so, it’s about time.

Trying to cut an impossible “soft Brexit” deal with the EU, giving the UK single market “membership” combined with home-grown border controls, will end in bad-tempered and chaotic stalemate – as this column has often argued. It could also, by the way, cause the EU to implode. The long, drawn-out uncertainty of yet another UK referendum, further polarizing the electorate and sowing utter confusion, is also fraught with danger.

Most British voters, ahead of the “smart money” and the media class as the public so often is, have already concluded this. A large majority, going well beyond the 52pc who voted Leave, now think the UK should press ahead and quit the EU. That’s why the Liberal Democrats are getting nowhere and why May will prevail – even if voters like her less than they did a few weeks ago.

Corbyn has so far won the campaign, no question. Since mid-April, after all, his public support has grown. Despite the Labour leader’s many gaffes, the Tories have also erred badly, not least by over-doing the personal attacks on Corbyn’s “terror-links”, which many voters, after the Manchester atrocity, view as opportunistic.

But I’d still say May will secure the 50-seat cushion she needs to justify going to the country. The “spiral of silence” remains with us – with many Conservative voters not admitting as much. And the same pollsters with the “hung Parliament” prediction everyone is now so excited about published an eve-of-election poll with the same message ahead of the 2015 contest, which the Tories won outright.

No-one knows what will happen of course. Corbyn was a 100-to-one shot to become Labour leader. The UK was never going to vote to leave the EU. The idea of Trump in the White House was, for many, a bad joke. So I can’t say for sure if the Tories will secure a solid majority on Thursday. Journalists call that, as do many others, “covering your backside”.

What is certain, though, is that the pound is in for a bumpy ride, once the election is the Article 50 talks begin in earnest – driven not so much by hard data, but by rhetoric and broader political sentiment.

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