JP Morgan, the Election and the State of the Pound

JP Morgan, the Election and the State of the Pound
June 1, 2017 Ben Leonard

JP Morgan thinks that if Theresa May loses the election, the Pound will strengthen.

JP Morgan thinks that if Theresa May loses the election, the Pound will strengthen.

The US Bank has come forward announcing that they feel the Conservatives’ commitment to a ‘Hard Brexit’ will be bad for the Pound Sterling and that even a hung parliament may be better than a Tory majority.

The Snap Election

Since current sitting Prime Minister Theresa May called a snap election, the Pound Sterling has increased almost 4 percent. The assumption was that the Conservatives would have a landslide victory in the snap election, thereby helping them negotiate in the Brexit negotiations. However, it now looks like the Conservatives are rapidly losing ground.

Analysts from the US Bank JP Morgan have come forward saying that they feel that the markets will react positively if Theresa May is defeated at the polls on June 8th. While the Pound Sterling is currently very volatile in the run-up to the election, the analysts feel strongly that a defeat for the Conservatives will be beneficial for the UK currency in the long term.

JP Morgan, which is the world’s second-biggest trader of currencies, believes that the prospect of a “less disruptive Brexit” under the Labour party may actually see the pound react more positively to a defeat of the Conservatives.

This news looks set to strengthen the opinion polls, which currently show the Conservatives as having lost the number of seats needed to form a majority. Some polls show them as having lost between 5 and 20 points, compared to a month ago.

This news seems very much in line with what is considered traditional market logic, which always finds in favour of parties that lean to the right. Such parties typically will have a tighter leash on public spending, whereas left-leaning parties – like Jeremy Corbyn’s Labour Party – will want to introduce heavier taxes and spend more.

A hung Parliament could be better for the Pound

However, FX Chief Strategist Paul Meggyesi said: “A hung parliament would in more normal circumstances be viewed as quite negative for sterling – that was very much the experience of the 2015 election when Sterling was braced for one of a myriad of potential coalition permutations only for sterling to jump by 3pc once David Cameron secured an improbable narrow majority.”

 “But in the post-referendum world, all political developments need to be viewed through a Brexit prism and an argument can be made that a hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties (Labour/Lib Dems/SNP) might actually be sterling positive.”

Traditionally, hung parliaments have been a sign of political uncertainty and therefore have caused sell-offs for the Pound.  

the Pound actually dropped by more than 1 percent last week

It doesn’t look like the markets have necessarily agreed with the assessment that JP Morgan delivered, however, as the Pound actually dropped by more than 1 percent last week.

The Pound had previously gained 2 percent since Theresa May had called the snap election on June 8th.

However, when a previous poll showed a narrowing of the Conservative lead over Labour, the Pound Sterling actually fell by 0.6 percent against the dollar. At 8.02 the pound was down 0.35% against the dollar trading at $1.281.  

Final thoughts

All of this might be good news for JP Morgan and their employees. JP Morgan was one of the first large banking firms to announce that they may move their base of operations in the wake of Brexit. They announced that they would be relocating their employees out of London, to Frankfurt, Dublin and Luxembourg. It is estimated that around 4000 employees will be moved.

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