Opinion polls have shown remarkable consistency over the past six weeks. Despite a four-point drop for the opposition Labour Party, a final YouGov poll suggests they are still on track to achieve the largest majority for any single party since 1832. Meanwhile, the ruling Conservatives have fallen by three points, the Liberal Democrats have gained one point, and Reform UK has increased by five points. The UK's ruling Conservatives are facing potential electoral defeat today, but the extent of the loss remains uncertain. Exit polls around 10pm should provide a clearer picture of the final outcome.
How might markets react? The muted response in gilts and sterling during this election campaign suggests that investors expect Labour to maintain fiscal stability. However, if Labour forms a minority or coalition government, markets might react negatively due to renewed fears of political instability. Current polls indicate a large Labour majority of 90-200 seats, with Conservative seats projected between 53 and 155. The incumbent party hopes the polling industry is underestimating them, as it did in 1992, but even a similar polling error would only give the Tories around 170 seats, far short of the 325 needed for a majority. With a majority of 50-100 seats, Labour should be able to implement its policy agenda, focusing on fiscal prudence and gradually moving towards closer alignment with the European Union (EU).
This could benefit UK growth and is one reason why GBP has risen since the election was called, reaching two-year highs of €1.19 against EUR and nearing $1.28 versus USD. The long-term outlook for sterling might become more bullish given Labour's intention to strengthen UK-EU trade relations, which should gradually reduce the pound's Brexit premium.
In the FX options market, the cost of insuring against FX volatility around the election date has remained relatively low, indicating investor confidence in the outcome. The election's impact on the pound will likely come from the lifting of the Bank of England speaker blackout. The interest rate narrative will ultimately drive the pound's direction in the coming weeks and months, so markets will welcome new guidance ahead of the BoE's next meeting in August.
