3 Scenarios For UK Election & Targets For GBP/USD – SEB

The UK elections are held tomorrow and tension is mounting. Where will the pound trade afterward?

Here is their view, courtesy of eFXnews:

SEB FX Strategy Research outlines 3 main scenarios for the UK elections on Thursday and the potential GBP direction for each of them.

“1) Tory majority: This is by far the most expected outcome and is likely mostly discounted in current market prices. Nevertheless, we believe such a result would cause the pound to strengthen mainly because the risk of a different outcome has been eliminated. In 2015 the GBP appreciated by just over 1% after exit polls showed a lead for the Conservative party, which later was confirmed. We forecast Sterling to gain around 1% if the Tories win a majority.

2) Labour majority: Given current polls this would be by far the biggest surprise to markets. In view of the Labour leader’s supposedly low popularity and socialist oriented programme with higher income and corporate taxes, we expect the GBP initially to weaken significantly if this is the result of the election. In this case we estimate Sterling will depreciate by 5%.

3) A more likely outcome than a Labour majority would be a hung parliament where the Conservative party receives most seats in Parliament but loses its overall majority. Although this probably would be less of a surprise than a Labour majority it would nonetheless cause a fairly large initial, negative reaction in the GBP. Given such an outcome we expect the currency to fall by 3.5%, to reflect the vast political uncertainty likely before parties devise a workable solution to govern the country,” SEB argues.

GBP/USD is trading 1.2905 as of writing.

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