Sterling Steady on Election Day

Sterling is nearly unchanged as UK Election Day continues. Pre-election polls have been remarkably consistent, putting the right-leaning Conservative Party in the lead, but with support well short of an outright majority, leaving a good possibility that a left-leaning Labor-SNP (Scottish National Party) coalition government will form. The SNP wants this, and while Labor has not so far made any hint of commitment, it will presumably not want to see a minority Conservative government take up the reigns. There are a lot of uncertainties, but one thing is for sure is that this will be a ground breaking election, and the weeks ahead look set to be politically chaotic by UK standards.

If the polls are accurate and Labor proves willing to hook with the SN, tomorrow will see the beginning of negotiations for a Labor-SNP coalition, possibly with the Liberal Democrats on board. Labor and SNP both favor looser fiscal policies than the current government. The consequence of this could bring forward BoE tightening, which would be positive for the pound, especially with added relief that an EU referendum will have been avoided.

This would also mean slower deficit reduction, and there is a risk that SNP will be in a position to pull the strings, which could spell unstable government and put the Scottish independence issue back on the agenda. Another scenario is that there’ll be political gridlock, which may not necessarily be a bad thing for markets given that both UK market and economic backdrops are solid, assuming this doesn’t morph into a political vacuum..

UK election results will come in from 21:00 GMT, which is when polling stations will close. Exit poll results will start to trickle in from then, and we should have a clear idea of national seat allocations by the early hours of Friday. The latest Guardian poll-of-polls projection has the Labor and Conservatives neck-and-neck with 273 seats each, well short of the 326 needed to form an outright majority government. This portends a hung parliament and will mean that alliances will likely form. The minimum combined seats a coalition government would need to survive a confidence vote is 322 seats. Based on the poll projection, this would rule out the current Conservative and Liberal Democrats making a repeat link-up, as their combined total is 300 seats.

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