(06 December 2019)DAILY MARKET BRIEF 2:Likely Tory victory boosts sterling

With just one week to go before the UK general election, opinion polls show the opposition Labour Party gaining ground. Still, the likeliest outcome, according to the latest available data, remains that the Conservative Party will win a majority, say strategist Daniel Trum and economist Dean Turner. "As the election date draws closer, markets seem to be increasingly positioning for this outcome," they say.

Should this scenario materialize, Brexit could be completed roughly by the end of January, potentially sending pound to 1.35 against the dollar. "We think all other credible outcomes point to minimal risk of a no-deal Brexit in the first half of next year," Trum and Turner add. Therefore, they retain their bullish medium- to long-term view on sterling versus the dollar, citing attractive valuations as well as structural reasons.

Only moving currency in a sea of tranquility

Sterling is currently the only major currency displaying significant levels of volatility, with markets pricing in almost three times as much one-month volatility in GBPUSD as in EURUSD (11.1% vs. 4.3%). "Participants are likely seeing opportunities in the pound difficult to find in other currencies at the moment," Trum and Turner note.

On the other hand, the larger moves come at larger risks. They believe that if UK voters deny the Conservatives a majority, the only credible outcome is a hung parliament. Under this scenario, the smaller parties could put Labour Party leader Jeremy Corbyn into 10 Downing Street, but his mandate would likely be limited. "Polls suggest that a Labour majority government is improbable. With a hung parliament, we would expect Article 50 to be extended again, followed by another EU referendum."

Under such a scenario, GBPUSD would likely be stuck in a 1.25–1.30 range until some clarity emerged. But even the positive sterling case of a clear Conservative majority could bring some pitfalls later on, they warn. Therefore, gains beyond 1.35 in GBPUSD look to be capped as the next phase of the negotiations ensues..

By UBS