This week, UK Prime Minister Theresa May shocked the market by calling for an early general election on June 8.

The British pound surged by around 2.5 percent in one day, as the market welcomed the move.

Great-British-pound-GBP-per-USD

This does not mean that Brexit is being reversed; it means that, if May can strengthen her Conservative majority, Brexit will be solidified. The market feels that this will add to more UK government stability since it will no longer be dragged down by internal opponents, hence enhancing May's negotiating power with the tough EU officials.

  • PM May was not elected as prime minister, but her popularity is rising. According to the polls, her Conservative Party is currently enjoying a 21-point lead ahead of the opposition Labor Party. If she can enhance her majority from the current 17 lawmakers in the House of Commons, she can solidify her status as being truly elected by the people.
  • The main reason for May's call was to weed out the ardent “Bremainers” in the government, who continue to oppose Brexit. Regarding Brexit, she has said, “The country is coming together, but Westminster is not,” criticizing the various interest groups that want to undermine her Brexit stance. Her mission is to execute Brexit in the best interest of the people within the deadline.
  • May's timing was also key. The next UK election was due in 2020, which is after the Brexit deadline of 2019. The fear was that UK negotiating power might be too weak to get any deal from the EU before the Brits could speak for themselves. If the Conservatives win a bigger majority, May will be prime minister until 2022, strengthening her position for a longer period.

My View: Most of the positive news for the British pound has been discounted, but we should be watching for the following unlikely scenarios to occur, since these factors could possibly impact the GBP negatively:

  • A French election that results in the unlikely outcome of a far-right victory. This could lead to a material fall of the euro, which could drag the GBP lower as well.
  • A possible Scottish referendum on independence from the UK. The majority of Scots want to remain in the EU so a referendum could add to instability.
  • Possible criticism against May around losing her credibility, since she had previously declared that she would not call for an election and has now flip-flopped on that vow.

 

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