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 reach 1.3140.
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 yesterday.
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.
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