If U.K. Prime Minister Theresa May pulls off an election victory on Thursday, the pound will likely stage a rally, analysts at Macquarie said in a note on Thursday.
“Any preliminary count headline that suggests Prime Minister May is on course to expand her parliamentary majority should be a pound-positive,” Macquarie analysts Nizam Idris, Gareth Berry and Teresa Lam said.
That’s counter-intuitive, they noted, as May has “championed” a hard Brexit, but Macquarie said that’s how the market has traded the pound risks since April 18, when the snap election was called.
A hard exit from the European Union, or hard Brexit, would come if the U.K. fails to reach a deal with the continent and leaves the EU’s lucrative single market, reverting to World Trade Organization (WTO) rules.
The pound has dropped from as high as $1.50 against the dollar just before the June 2016 vote to exit the European Union to as low as $1.1979. At 10:20 a.m. HK/SIN, the pound was fetching $1.2959. But Macquarie expected that any post-election pound rally could be short-lived.
“We think the sterling downtrend could resume within days though, as May’s new cabinet is named and EU-U.K. negotiations get underway,” Macquarie said.
But Macquarie noted it couldn’t rule out a scenario for a hung parliament, which could weigh on the currency.
When May “reluctantly” called the June 8 snap election seven weeks ago, the Conservatives boasted a seemingly unassailable lead over the left-wing Labour. However, Labour leader Jeremy Corbyn has since soared into contention, putting May’s election gamble to gain a stronger majority and Brexit-negotiation mandate in doubt.