(Bloomberg Opinion) -- At last we have a date for the inevitable U.K. general election, or at least a range of probable dates: Dec. 9 to Dec. 12. The opposition Labour Party has agreed to back the ruling Conservative Party’s legislation for an early election, which will be put to Parliament on Tuesday.
The pound’s instant reaction was to strengthen versus the dollar, a somewhat surprising response to would will be a fevered six weeks of opinion polls and uncertainty (assuming there are no last-minute changes of heart from Labour lawmakers). The fracturing of British politics along Brexiter and non-Brexiter lines makes elections fiendishly difficult to predict and voter polling hard to trust. But it’s the overriding expectation of currency traders that Prime Minister Boris Johnson’s championing of Brexit will win him a majority.
Recent polls have shown a consistent lead for his party over Labour of 10%-15% or more, which would probably be enough to secure victory. In that event he would return to Parliament with his Brexit deal early next year and pass it without fear of significant alteration. Even that sniff of some kind of resolution to the three-year Brexit saga is enough to cheer some sterling bulls.
Of course, politics is never without risk. Johnson will look at his predecessor Theresa May’s last campaign, where her initial poll lead of 18% evaporated to 2%, resulting in a hung parliament and the current Brexit impasse. But Johnson is a better campaigner.
At the same time, such are the depths of Corbyn’s unpopularity that even a defeat for Johnson would probably mean victory for some kind of second referendum-supporting coalition of Labour, the centrist Liberal Democrats and the Scottish National party. That would naturally water down many of the hard left policies supported by Corbyn that have so bothered investors, such as nationalizations and wealth redistribution.
While fears of a no-deal Brexit have tended to dominate headlines, the prospect of a Corbyn government has always been a bigger negative for the pound. The threat of no deal is now pretty much eradicated, as the Conservatives will campaign on bringing forward Johnson’s deal with the European Union. The Corbyn threat looks much diminished too. So overall there’s less downside risk for sterling.
It will be a bumpy road up to Britain’s first December election for nearly a century, but if Johnson keeps his nose in front then the pound should continue to slowly appreciate.
Just remember that the U.K. and the global economy aren’t in a strong place so any post-election or Brexit bounce is going to be tempered, especially as 2020 will be the year of negotiating a future trade deal with the EU — a thorny prospect. There’s still the very slight danger of the U.K. exiting without a deal under World Trade Organization trade terms at the end of the current planned transition period in just over 14 months time. If it happens, traders are right to welcome this election, without getting carried away.
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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