Pound Sterling Forecast: Talk of October Snap General Election Poses Further Downside

The Pound recorded its ninth consecutive weekly loss against the Euro ahead of the weekend, and it recorded its lowest weekly close against the U.S. Dollar since April 2017.

The weakness extends to the majority of major currencies, as a multi-week sell-off extended amidst a combination of political uncertainty and deteriorating economic data continues to weigh.

For Sterling, it’s not just the Brexit deal/’no deal’ equation that is injecting confidence-sapping uncertainty into the market: the prospect of a General Election is another factor at play with news that the Conservative party are gearing for a General Election before the year is out.

This is news that will do little to boost confidence in the UK currency.

The Financial Times reported on Friday that “Conservative MPs are spending the summer preparing for a snap general election, claiming that if Boris Johnson becomes prime minister he will either be forced to go the polls or decide to take a gamble to increase his majority.”

Even in pre-Brexit times, impending elections did tend to inject uncertainty into the market and contribute to under performance by Sterling.

The incoming Prime Minister – in all likelihood Boris Johnson – will find he has a wafer-thin parliamentary majority at his disposal.

If the EU refuse to renegotiate the Brexit deal in a substantial manner – as evidenced by incoming European Commission President Ursula von der Leyen’s recent comments – then there is a high likelihood Johnson will have to pursue a ‘no deal’ if he is to deliver on his promise of delivering Brexit by October 31.

But, a number of Conservative Party MPs have warned they would resign from the Party in order to prevent a ‘no deal’ outcome. This could effectively paralyse government. There is also a chance they could join the opposition and deliver a vote of no-confidence in the Government if this was the only route to preventing a ‘no deal’.

With Parliament unable to agree on the next step forward, our economics team believes that the risks of a general election have materially risen. A hard Brexit or the prospect of a new election is likely to weaken the GBP further, while a controlled withdrawal or a second referendum is likely to reduce the risk premium on the GBP and strengthen it.

GBP/EUR currently trading at 1.1159 at 10:00 am GMT

GBP/USD currently trading at 1.2536 at 10:00 am GMT