What does the General Election mean for sterling and the economy? What the experts said

 
Jasper Jolly
Polling Stations Across The UK
The General Election is set for 8 June (Source: Getty)

Prime Minister Theresa May has shocked political observers and investors alike with her decision to call for an early General Election.

The announcement of the vote on 8 June has seen sterling surge to its highest level since 2 February, with markets seemingly predicting a strong majority for May’s Conservative party.

With another bout of political drama coming up, the prospects for the pound will be tightly tied to the prospects for a strong majority for May, according to most analysts.

Sterling to welcome clarity

Dean Turner, economist at UBS Wealth Management said: "The muted response in sterling, gilts and UK equities suggests markets are savouring the possibility of much-needed clarity around the government’s Brexit negotiation stance.

“If the General Election is held, we believe it is highly likely the Conservatives will increase their majority and firm up the future direction of Government policy, particularly in regard to Brexit."

Aberdeen Asset Management investment manager Luke Bartholomew said: "It will take investors some time to digest the effects of the election in the next few days. A big factor for them is whether the election will make a softer stance on the Brexit negotiations more likely.

"The election should hand Theresa May a much bigger mandate to stand up to the harder line, anti-EU backbenchers which currently hold a disproportionate sway over her party’s stance on Brexit. That would be welcomed by financial markets."

Kathleen Brooks, research director at City Index Direct, said: "If the market is taking the view that it is better the devil you know, and with the odds massively in Theresa May's favour that she will win this election, we could see the pound catch a bid as we lead up to 8 June, and our 1.30 forecast for GBP/USD doesn’t seem that outlandish."

The prospects for the pound will also be affected by the stances taken by opposition parties.

Shilen Shah, bond strategist at Investec, said: "Overall, today’s announcement suggests that PM wants full control of the Brexit process without any interference from the opposition."

Uncertainty discount

Adrian Lowcock, investment director, Architas: "Politically the timing might not get any better for the Conservative party to win a general election and increase their majority. The UK economy has remained strong following the EU referendum and stock markets have rallied to new highs. At the same time the opposition parties are lagging behind in the polls.

"General elections create uncertainty and markets do not like uncertainty. The market has begun to price this in and there is likely to be an ‘uncertainty discount’ on the UK stock market until the election result is known.

"The government, which had repeatedly and explicitly ruled out calling a snap election only a month ago, will now be forced to set out a manifesto for what it expects of the UK’s future role.

"However, the election adds another layer of uncertainty to a year already marked by big political risk events, including elections in France and Germany."

Negotiations on hold

It also makes it more likely little will be achieved in Brexit negotiations during the first half of 2017. The prospect of waiting for German elections in September may also have prompted May’s decision to call for a snap contest.

Claus Vistesen, chief Eurozone economist, Pantheon Macroeconomics, said: "It's anyone's guess what happens next with Brexit, and indeed the EU. We sympathise with investors’ desire to position for various outcomes, and to hedge tail risks, but we feel that such actions are a bit like throwing arrows into a dark void at the moment.

"Polls overwhelmingly suggest that the Tories will do a clean sweep, which is exactly what Mrs May is attempting to crystallise in order to secure a strong mandate for Brexit negotiations."

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