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Pre-UK General Election

With less than 24 hours to go until the UK goes to the polls, you’ll have been bombarded with every survey from Ipsos Mori to Survation. However, if you’re going to look at one poll right now (or rather analysis of a basket of polling data), it’s probably going to be the YouGov General Election MRP Model. This isn’t because we think that the MRP model is infallible, but rather because it is one that has impacted GBP more than any individual polling data.

What is the MRP model and why does it matter?

This election cycle the YouGov model has been treated with similar reverence as the 5y5y is spoken about by European Central Bank watchers (five-year five-year swaps being market pricing of what five-year inflation expectations will be in five years’ time and a helpful measure of whether decision makers at central banks feel they have inflation trajectories within their stated target bands).

Rather than a poll, the YouGov Multi-level Regression and Post-stratification model, to give it its full title, is an estimate of what the range of possible results would be if the election took place today and the polling-data-derived voting intention was showing what it currently shows.

YouGov’s seat-by-seat breakdown of voting intention has garnered plenty of attention in this cycle after being the closest to calling the results in the 2017 General Election, not just at a national level, but also in some of the surprise swing seats.

Outcome far from certain

The first release of YouGov MRP expectations released at the beginning of the month showed the Conservative Party heading towards a 68-seat majority in the House of Commons, a win that would leave Boris Johnson with plenty of support to get key votes through parliament, notably those to move to finalise the form of the United Kingdom’s withdrawal from the European Union.

The final YouGov MRP model shows a much more slim majority for the Conservatives - down to 28 seats. Crucially, the margin of error could put the final number of Conservative seats from 311 to 367 and leave the UK deadlocked with a hung parliament.

The YouGov model is far from infallible (indeed YouGov itself notes that: “the model will be less capable in seats with very unusual political circumstances (such as Devon East, or Finchley and Golders Green) and these are reflected by bigger margins of error on our projected vote shares.”) However, much like the 5y5y and other similar measures, what drives markets as much as events is expectations.

What does the election mean for GBP?

GBP has rallied consistently since parliament was dissolved to trigger the start of the election campaign, yesterday creeping a whisper above USD1.3200 and earlier this week climbing to EUR1.1912. However as a measure of credence that markets place in the MRP model, both took a hit on the release of the latest projections.

The staunchly socialist Britain proposed by the Labour Party and its leader Jeremy Corbyn makes nuance somewhat irrelevant when forecasting the outcomes for sterling if he were to replace Boris Johnson as Prime Minister. The Labour Party manifesto promises huge corporation tax hikes, income tax increases, widespread renationalisation of utilities as well as part-nationalisation of all businesses of over 250 employees. One can argue about the precise levels of capital flight in the event of a Labour government. But that there would be an immediate exodus of capital is fairly certain – even if the government would likely step in with capital controls to stymie the flow of corporations and individuals moving assets out of the UK.

We don’t like to anthropomorphise financial markets (markets don't "want" anything, political outcomes or otherwise), but in this case the sterling upside we have been seeing can very reasonably be seen as an abatement of market fears of a Corbyn-led government. However, while an outright Labour win looks extremely unlikely at this current point in the election cycle (although some are labelling the fat-tail risk of vote distribution and tactical voting leading to a Labour victory as a “Red Swan” event), a hung parliament where neither party has a majority is a negative risk to GBP with a higher probability of occurring. Or course the middle ground between this and a Conservative majority government would be a return of a minority government, but given the deadlock we saw as Boris Johnson attempted to push votes through while in minority, one would assume that in both cases we would be looking down the barrel of a second general election, with the same levels of uncertainty having a negative impact on GBP.

This is not a statement of support for any party, but a reflection of likely GBP price action given a perceived increased or decreased clarity over the United Kingdom’s likely political trajectory (and with it its fiscal and monetary policy path) over the short and the longer term. But in very simple terms a majority Conservative government will be positive for GBP – it will be an outcome seen to clear the path for Brexit progress, and a sigh of relief from individuals and businesses fearful of a socialist government. Anything less will be negative for GBP in degrees of severity from minority Conservative government to Labour victory.

Longer-term, the election outlook will have implications for Bank of England rate setting and further policy – this is something that we will be looking at in further detail on Friday following the general election results. However, whether you are a client of Labarde Management or not, please call us on (+44) 0203 4881169 with any questions you may have about your foreign exchange concerns,

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