On Tuesday, UK PM Theresa May announced surprise general elections, to be held on June 8. Sterling rose more than 2% to a six-month high of $1.2904 following the news, snapping its prolonged downturn since the referendum last year.
What is May’s motivation behind the announcement?
Even though her party has a majority in the Parliament right now, it is slim and her stance on Brexit and negotiating power is vulnerable to interference from the opposition as well as the hardliners from her own party. The elections are a way to gain a bigger majority against the opposition, unite her own party and gain a clearer mandate (from the public and the Parliament) to lead the Brexit negotiations smoothly without too much of internal or external party strife.
Why did sterling rise? Is this rise sustainable?
The markets considered this event sterling positive. Polls suggest strong chances of a Conservatives majority. Markets are hoping this majority would bring in policy stability and reduce uncertainty in the Brexit negotiations and also give May more leeway in adopting a pragmatic approach to negotiations without having to give in to the whims of the proponents of “Hard Brexit” within her own party.
While the removal of some uncertainty will certainly support the boost in Pound, it still remains vulnerable to multiple headwinds that include risk of a divided election outcome, interest rate differentials with the Fed and uncertainty related to UK’s trade relationship with the EU.
Disclosure: Author and stakeholders of CityFALCON may have vested interest in the financial securities discussed in the article