ArticleApril 19 2017Reading time 4 minutes

UK Election: Britain votes again…

Having repeatedly stated that she wouldn’t go down this road, opinion polls have proven too tempting to miss out on winning her own mandate rather than being hamstrung by David Cameron’s 2015 election promises. Opinion polls suggest that Theresa May would win a majority well in excess of 100 seats. There is some concern that this will eat into the two-year window for Brexit negotiations, but the EU has suggested it is unlikely to start face-to-face meetings until June in any case. Moreover, this move by the Prime Minister suggests she is confident in her Brexit negotiation strategy and is of the view that a strong performance at the election can give her positive momentum and confidence as the Brexit meetings start.

May needs two-thirds of MPs…

Under the Fixed Term Parliaments Act of 2011 the Prime Minister needs a two-thirds majority of the 650 MPs in parliament to allow her to dissolve parliament and hold a general election. This vote will be held tomorrow and should pass relatively easily.

I welcome the Prime Minister’s decision to give the British people the chance to vote for a government that will put the interests of the majority first

The Conservatives currently have 330 seats, meaning that they need 104 MPs from other parties to back the motion. All major opposition parties suggest they will vote in favour.

We’ve been here before; the UK electorate will once again be facing a June vote. But make no mistake – the issue of the UK’s future relationship with the EU will undoubtedly underpin campaign rhetoric. Today’s news has been a good enough reason for another squeeze in short GBP positions – in our opinion the most credible explanation for the post-announcement rally in GBP. We see 1.28 as very strong GBP/USD resistance. Based on current positioning we think a break of 1.28 could be worth a move to 1.30-1.31 – with an outside chance of a painful move to 1.34 for those forced out of short GBP positions. Still the bar for a breach of the 1.28 level is high given the confluence of uncertainties (cliff-edge Brexit risks, future of Scotland and low UK interest rates for longer).

Brexit support has grown since June

51.8%

xxxxxx

Proportion who voted Leave on 24 June 2016

55.0%

Proportion now backing Brexit, according to latest poll

Some may see this general election as an opportunity to reverse the Brexit vote, but support for Brexit appears to have increased according to various opinion polls. The fact that the economy has proved resilient so far has perhaps led to some people who backed “remain” due to economic fears to think again. Nonetheless, the election could see the pro-EU Lib Dems win some seats, most likely at the expense of Labour and the SNP, but nowhere near enough to alter the UK’s path out of the European Union.

FX view: Early election prompts short squeeze… but uncertainty is high

We’ve been here before; the UK electorate will once again be facing a June vote. But make no mistake – the issue of the UK’s future relationship with the EU will undoubtedly underpin campaign rhetoric.

Today’s news has been a good enough reason for another squeeze in short GBP positions – in our opinion the most credible explanation for the post-announcement rally in GBP.

We see 1.28 as very strong GBP/USD resistance. Based on current positioning we think a break of 1.28 could be worth a move to 1.30-1.31 – with an outside chance of a painful move to 1.34 for those forced out of short GBP positions. Still the bar for a breach of the 1.28 level is high given the confluence of uncertainties (cliff-edge Brexit risks, future of Scotland and low UK interest rates for longer).

Today's snap election announcement is no reason for us to change our GBP outlook; we still look for GBP/USD to move down towards the 1.20 lows - and EUR/GBP back to 0.88 - later this year.