Summary:
There’s many ways to look at what is the expected outcome of today’s UK general election but here we will focus on what bookmakers are expecting as well as the options market before finally looking at the FX market.
Bookmakers expecting Tory majority
Leading bookmakers are giving a roughly two in three chance that we get a Conservative majority with a one in three chance of a hung parliament. A Labour majority looks like a long shot according to this. Source: Betfair Exchange
Looking at the seats markets, the Conservatives are priced to win 339 constituencies which would give a majority of 28 (the same as the most recent YouGov MRP poll) with Labour predicted to lose 40 from the 2017 election. Source: Sporting Index
Wild swings and downside risks
Looking at the options markets there are two clear themes being priced in for this election:
1. Implied volatility spikes
The 1-day implied volatility in GBPUSD is at its second highest level in almost 4 ½ years - second only to the period surrounding the EU referendum in 2016. The current level is currently comfortably above the levels seen in the last 2 elections. Source: Bloomberg
The following shows the moves in GBPUSD for the day after the largest public votes in the UK (beginning at 10pm the day of the vote):
2015 election: +1.38%
2016 EU referendum: -8.05%
2017 election: -1.62%
2. Downside concerns growing
The 1-week risk reversal for GBPUSD (a gauge that shows the premium attached to upside exposure - downside exposure in the market is at its lowest level since the period around the 2016 referendum. Current level is comparable to the time around the 2017 election. Source: Bloomberg
Pound has gained during the election campaign
The pound against the US dollar has gained by around 430 pips (3.3%) since the election was called. The bulk of this gain, 350 pips, came after the 1st YouGov MRP model showed a strong Conservative majority. Due to this and the strong gain in October when it looked like Boris Johnson’s new Brexit deal would pass, the conventional wisdom is that in the near-term a Conservative majority would be positive for the pound. Source: xStation
GBPUSD remains near 8-month high
GBPUSD hit its highest level since March this morning with the market receiving a boost on some USD weakness following the FOMC decision last night. The high was 1.3229 is just over 20 pips from a symmetrical target of 1.3250 - taken from the 7-week consolidation which occurred after the October rally. A more ambitious symmetrical target would come in at 1.3570. It’s worth stressing that technicals will very much take a back seat in the next 24 hours and as shown by the IV chart above, there could be some wild swings ahead for GBP pairs. Source: xStation