Your guide to the numbers game for the UK election and how that could affect Brexit and GBP
An election has been called for 12th December and while we go through the speedy campaign motions, Brexit is on hold (barring any surprises from any party). This puts us into yet another period of uncertainty until we know who wins the election, and by how much.
First the numbers;
- One party must secure 326 seats to take the majority. Anything less and a coalition is needed for the party with the most votes to be able to form a government.
- If the current PM can’t form a government, he/she can choose to lead a minority government but then if the new Queens speech (where the gov sets out it’s agenda for the new session) gets voted down (likely), that’s seen as a vote of no-confidence and the PM likely resigns and the leader of the party with the next highest seat count gets asked to form a gov.
- If they can’t do so either, we go back to the polls.
How will the numbers affect Brexit going forward?
The best outcome:
Boris will need to clean up a large majority to be able to pass his Brexit deal. He’s needed 320 vote to pass things previously so he’ll want a good margin on top of that to nullify any remaining Brexit rebels left in his party. He should have cleaned these all out by now, or brought most, if not all, on his side now. Yesterday, he pulled 10 of the 21 MP’s he ousted back into the party. A large majority (I’d say 330 min but 340 or more would be ideal) would be the most positive outcome for Brexit and GBP.
The worst outcome:
Long and short, anything less than a majority (for any party) means a huge f***ing mess again, any way you cut it. The best ‘worst’ situation for Boris would be something similar to what happened in 2017, i.e a coalition with the DUP which would give him a majority. However, there’s two big risks with this also.
- There’s no guarantees the DUP remain the main party in Northern Ireland.
- They still don’t back Boris’s Brexit deal, so while he may get to stay in government, Brexit remains in limbo.
If another DUP coalition does happen again, then both a Brexit deal or no-deal remain the options. It’s still all a numbers game though depending on how much influence the DUP numbers have (they mattered by 8/10 seats in 2017 as May took 318). If Boris gets closer to 325 and needs less DUP seats, then with oppo party MP’s that support Brexit, the numbers might be there to pass the deal.
The worst ‘worst’ outcome for Boris is that he fails to get a majority, nor is able to form a coalition. There’s probably more chance of me sprouting a pony tail than any of the other parties wanting to join Boris and the Conservatives, so that’s off the table. There’s still talk that if the Brexit party do well there might be a coalition there but Boris has ruled that out previously.
However, the worst for Boris does not necessarily mean the worst for Brexit (and thus GBP). A hung parliament is not a bad thing for Brexit as Parliament cannot remain in limbo like it is now. A government with a majority must be formed either way. Whether that’s Boris with a coalition (and a chance to pass his deal), or an opposition party governement or coalition (a good chance of a 2nd ref or no-Brexit at all), all roads still lead away from a no-deal/hard Brexit scenario.
However (I’m using this word a lot), we then have to calculate the election result effect on GBP and whether it’s good/bad for Brexit and good/bad for the country and the economy because remember, the party that wins is going to set policy for the UK for perhaps the next 5 years. In that sense, the Conservatives are more market friendly than any of the others. And, then we have the SNP, who if they are in a coalition government, will be pushing for another Scottish referendum, which adds more uncertainty into the mix. The UK could go from trying to leave the EU to fracturing into several pieces (Wales might follow after Scotland).
The above could be positive for GBP if the market thinks that Brexit will be soft or not happen, and if it doesn’t take a dim view of whoever the government is. Personally, I think the GBP would react positively to a change of government meaning a softer or no-Brexit, and would overlook any possible negatives on the policy front in the short-term.
The above is just a view of a few main outcomes that might happen. There’s a thousand and one twists and turns the elections could take and to try and list them all would tie us all up in knots for both what it meant for Brexit, the UK and GBP. We can’t even start factoring the EU reaction to the elections and that’s also going to be a big factor after. For example, we’ll still need another extension to give time for any 2nd ref to be put together and you can bet there will be fights over that in Parliament, with the Conservatives and other leavers doing exactly the same as what the remainers have been doing to stop Brexit. That all adds more time, more uncertainty and brings the EU back into the equation.
What happens now?
All the above is based on what the result of the election might be but we’ve a month and a bit to go until then. We’ll be swapping floods of Brexit headlines for floods of campaign headlines, polls, opinion and all the rest of it. Unfortunately, for us and GBP, the headline risk remains as high as ever, it’s just the subject that’s changed. Earlier this week, I updated the GBPUSD “range guide” to include the election phase and that remains valid in my opinion.
I’d say we’re looking at 1.25-1.30 but there’s a lot of focus on the 1.27 area too, so we might see 1.27-1.30.
How should we trade GBP now?
I’m still long but I’m going to respect this election phase, so I’m going to look at dragging my stop right up from the 1.24’s. There is so much uncertainty to come before we even get back to Brexit, and the whole picture might change come 13th Dec. Last week we were one step from possibly getting Brexit done, and now we’ve got a flight of steps on one side, and a cliff edge on the other. That’s too much risk for me so I’ll go back to headline sniping but otherwise sitting on my hands on GBP. I’ll try and protect what I’ve got in the meantime, and make a decision whether to keep or fold the position closer to the election. With Brexit, the path (though messy) was pretty clear towards the end. A deal was there and no-deal was low risk. That all might change now so that makes my prior strategy redundant until I know what’s going on.
The best advice I can give here is to treat GBP the same as you have been for the last few years. Don’t place too much trust on the tech, don’t take unessary or big risks, and be ready to take or protect profit when it’s there, and be quick to fold positions when they’re wrong.
As usual, we’ll be dissecting all the news, moves and trades first and in more depth and detail in our trading room, which you can check out here.