Pound Sterling To Gain On Huge Labour Victory

Looking at the General Election, MUFG considers that the best case for the Pound would be a large Labour majority due to expectations of medium-term political stability and improved relations with the EU.

It added that a worst case would be for a hung parliament, although markets are unlikely to consider this a significant risk given the current opinion polls.

MUFG notes that three separate MRP (Multi-level Regression & Poststratification) polls this week have indicated that Labour will win the General Election with a huge majority.

One poll suggested that the Conservative Party would win less than 100 seats with a Labour majority of over 300.

It considers that a large majority would underpin the Pound on expectations of political stability.

Assuming a Labour victory, fiscal policy will be an important near-term focus and the bank notes that key Labour figures have indicated that there will be a relatively restrictive policy, although pressure for increased spending will inevitably increase.

MUFG considers that there is unlikely to be a near-term loss of confidence in gilts or the Pound.

At the margin, the Bank of England could also be less willing to lower interest rates.

The bank expects that a Labour government will look to strengthen relations with the EU.

Although it does not expect any move to rejoin the single market, it expects the government would push for a further easing of trade friction.

It considers that a hung parliament would be damaging for the Pound as an initial reaction, although overall selling should be limited.