Image credits: Keir Starmer's official campaign. Edward Massey / CCHQ.
The British Pound enters General Election 2024 with a spring in its step, but there could be some wobbles around 10 PM when the exit poll is released. Here's what to look out for.
Thursday night's exit poll - due at 10PM - is the big moment as it tends to give a very accurate snapshot of who the next Prime Minister will be and the kind of majority he will command.
"The exit poll has largely been accurate in six of the past seven elections," says Shreyas Gopal, a Strategist at Deutsche Bank. "The exit poll showing anything other than a healthy majority would be a very large shock."
The base case is a significant win for Keir Starmer's Labour Party, and we would not be surprised to see the Pound tick higher on confirmation of such an outcome.
Currencies like certainty and a big Labour win would dissipate any lingering risk premium in Pound exchange rates, however small that might have been.
"Thursday's general election is this week's main focus, with most plausible scenarios – according to available opinion polls – catalysing further pound strength in our view," says a note from Barclays. Barclays are buyers of the Pound against the Euro, which will see a limited rebound from Sunday's French election result.
The final large-scale YouGov poll of the campaign found that the Conservatives will be reduced to just 102 MPs, losing almost 70% of the seats the party won five years ago, giving Labour the largest majority seen in the House of Commons since 1832.
On signs of a strong Labour showing, Deutsche Bank's Gopal expects Pound Sterling to be broadly unchanged, "and whether EUR/GBP retains its (albeit reduced) risk premium relative to rates pricing will then depend more on the results of the second round of the French election than the UK ballot."
There is a tail risk for the Pound if the Conservatives do better than current polling suggests, which is not out of the realms of possibility as a significant portion of the electorate remains undecided.
A 'hung parliament' - where no party wins an outright majority - could introduce a shot of uncertainty into the mix, resulting in a weaker Pound.
Here, we think the Pound to Euro exchange rate could dip below 1.18. If Sunday's French vote also results in a hung legislature, the route to the mid-1.1750s and then 1.17 would become clearer.
The Pound to Dollar exchange rate would potentially fall to 1.27 again, but we think the USD side of the equation is a significantly more important driver than GBP, which means Friday's U.S. jobs report will have the final say.
"You can never say never in politics or markets, so we are wary of surprises triggering increased volatility and unexpected FX moves. The biggest downside tail risk to the pound being a hung-parliament, if no party has a majority of seats," says George Vessey, Lead FX Strategist at Convera.
"We saw this back in the 2010 & 2017 elections and the pound lost over 4% in value in just over a week. But this is not our base case scenario," says Vessey.
A 4% loss on a hung parliament in 2024 is highly unlikely because the two major parties' policies are so closely aligned and fiscal risks on any subsequent political grouping are low. Expect the Pound to recover in the days following news of a hung parliament.
Hedging against pound weakness is also at a seven-year low. "This is a welcome comfort given how UK assets have been dancing to the tune of political drama for so many years," says Vessey.
The British Pound enters voting day as the best-performing G10 currency year-to-date after the U.S. dollar due to an improving economy and high interest rate settings at the Bank of England.
Market attention will swiftly turn to Sunday's French election before global central bank policy hogs the limelight until November's U.S. Presidential vote.