GBP: A Theresa May win would be positive - Danske Bank

According to analysts from Danske Bank, the pound could make a relief rally in case of a victory of the Conservative Party. 

Key Quotes: 

“ Despite the polls having narrowed, PM Theresa May is still expected by most to win the UK election and get a bigger majority than at present but smaller than expected at the beginning of the negotiations.” 

“Whether the size of the majority will be large enough for Theresa May to avoid being vulnerable to hardline Brexiters is hard to predict, as it depends on the Brexit stance on new members of parliaments.”

“Most expect GBP and UK assets to (relief) rally in case of a Conservative victory, regardless of the size of the victory, as it would remove one source of uncertainty. How big a rally depends on the size of the majority.”

“A ‘hung parliament’ (i.e. no party wins absolute majority in the House of Commons) is seen as the most negative scenario, as it would increase the political uncertainty significantly in a situation where it is high to begin with. This would be GBP negative. We seem to be alone in our view that a governable coalition between Labour, LibDems and SNP would be positive for GBP on 3-12M due to the softer Brexit stance among the three parties. One bank argued that markets will instead focus (among other things) on UK public finances, as Jeremy Corbyn has some expensive promises in his manifesto.”

“We seem to be alone in the view that a governable coalition between Labour, LibDems and SNP would be positive for GBP on 3-12M due to the softer Brexit among the three partiers (expected range 0.75-0.80).”

“The most difficult part of the Brexit negotiation is the beginning (not least the settlement of the ‘divorce bill’). Most expect a free trade agreement covering goods but not services to be concluded in three to five years.”

 
How could the UK general election affect the Forex market?
 
Conservative victory with Absolute Majority (Scenario 1)
 
A Conservative victory with an absolute majority should be supportive initially for the pound. Stock markets would be relieved on the lower corporation tax outlook and a risk-on environment could be the expected outcome. However, with a focus on Brexit and PM May's hardline - "No deal is better than a bad deal" - approach to the negotiations, a hard Brexit outlook could equate to a bearish scenario to the pound eventually - (Note: Remain cautious of a 'buy the rumour sell the fact' trade - a Conservative victory is virtually priced in).
 
Conservative victory without Absolute Majority (Scenario 2)
 
With the narrowing of the polls and a trend that has been continuing, the possibility of a hung parliament should not be ruled out, (When no party has won enough seats to have a majority in the House of Commons). Such an outcome could be highly bearish for the pound due to the uncertainty for markets to deal with. However, in a hung parliament, the incumbent prime minister stays in office until it is decided who will attempt to form a new government - this could support the pound after an initial sell-off. (Note: A hung parliament does NOT necessarily mean a coalition government). 
 
 
Laborist victory (Scenario 3)
 
A balanced outcome for the pound with initial volatility on the basis of Labour’s manifesto. Initially, a lower pound could be the immediate outcome bias due to increased uncertainty and a reduction of inflows. However, a Labour victory should mean a softer Brexit outlook and austerity would be removed, (Fiscal easing lifting growth and inflation expectations). Higher real yields may offset the initial weakness in the pound. 
 
When is the UK general election 2017?
The United Kingdom snap general election is scheduled for June 8, 2017. The election will elect representatives for the 650 districts that make up the House of Commons, the lower house of the British Parliament.
 
Theresa May Called for UK Snap General Election
 
UK Prime Minister Theresa May has announced plans to call a snap general election on May 15th. Explaining the decision, Mrs May said:  "So we need a general election and we need one now. We have at this moment a one-off chance to get this done while the European Union agrees its negotiating position and before the detailed talks begin.”