UK Snap election announcement: short-lived sterling strength?

WITH markets focused on geopolitical events in Korea, the US and France, the
chances of a ‘snap’ general election in the UK were being overlooked by many
market commentators.  The surprise announcement led to a sharp rally in
sterling and falls in UK equities.

The immediate strength in sterling following the election announcement can
be explained by two conflicting theories:

a)   If the incumbent Conservative Party can win the 8th June general election
convincingly, this may increase the likelihood of a ‘hard’ Brexit* outcome.
Given that a ‘hard’ Brexit has so far been associated with sterling
weakness, the immediate strength in sterling following this morning’s
announcement may therefore seem perverse. However, the market may view a
convincing general election victory as strengthening Theresa May’s hand in
European Union (EU) negotiations, and therefore increase the chances of her
delivering on her stated objectives, such as free trade with the EU – a
positive for sterling.

b)   Or, the market could be seeing a snap election as an admission from the
UK government that executing its objectives on Brexit is harder than
originally thought. This increases the likelihood of a ‘transition’ deal
with the EU, or a second independence referendum – again, both a positive
for sterling.   

To chat about this in more depth, perhaps over a coffee, call Charles
Hutchinson on 952 79 79 23 or 605 903 472

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