By Callum Keown
The pound has held onto strong gains as Boris Johnson swept to a convincing victory in the U.K. election.
Sterling /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.0915% surged 2.7% to $1.348 after the exit polls predicted an 86-seat majority on Thursday night and held firm as the election results filtered through on Friday morning and confirmed Johnson was on course for a landslide victory. The jump was the largest one-day gain since January 2017.
The FTSE 100 is set to open slightly higher but could experience greater gains as London wakes up to Johnson’s victory.
Johnson secured a majority shortly after 5am GMT with a number of results still to come.
The strong majority gives Johnson the ammunition to get a Brexit deal through Parliament, avoiding investors’ fears of a no-deal Brexit or a Jeremy Corbyn-led Labour government and providing much-needed certainty.
UBS Wealth Management economist Dean Turner said: “Just as Boris Johnson was desperately seeking his majority, this result would give the markets their ultimate wish: clarity. We’ve long said that sterling looks a very cheap currency. If Brexit is indeed completed by the end of January, we see the pound trading as high as 1.35 against the US dollar.”
ING’s global head of strategy Chris Turner said the pound may not have much further to rise but predicted a “sizable rally” for U.K. equities when markets open on Friday.
He said: “A large Tory majority at least increases the chances of some transparency returning to the business sector and certainly avoids the Labour threat of a large rise in corporation tax and the nationalization of the utility sector. Again a big move for UK equities typically falls into the 2.5-3.0% area and would see the FTSE reclaim some of the ground lost against European equities this year.”
Neil Wilson, analyst at Markets.com said: “The exit poll shows a whopping victory for the Conservatives and the perfect result for the market and for business. Markets hate uncertainty but they would have hated a Corbyn government a lot more.
“Despite the sterling strength FTSE futures are holding firm – a sign that the market likes this result.”
A strong pound would typically send FTSE 100 futures significantly lower as the index is largely made up of big overseas earners.
Edward Park, deputy chief investment officer at investment manager Brooks MacDonald said “Brexit sensitive” stocks would rally on Friday if the exit polls proved correct. However, he predicted “continued support rather than an exuberant rally” as a Conservative victory has already been priced in.
He said: “The gains seen amongst Brexit sensitive sectors, such as housebuilders and retailers, in the last 3 months should be extended as trading opens on Friday. In turn those multinational UK sectors that have predominantly US dollar or Euro revenues, such as resource companies, are likely to underperform as the sterling rally reduces the value of foreign earnings.”
The pound has had a volatile few days - and indeed weeks - leading up to the election.
Sterling rallied to $1.32 on Wednesday on increased confidence of a Boris Johnson victory but dropped back to $1.313 on Thursday as the final poll suggested the election would be a close call. The currency then enjoyed a late rally to $1.317 ahead of the exit polls as investors remained cautious.
The pound has been up and down in recent weeks as investors react to election polls with two fears in mind: a Labour government under Jeremy Corbyn, who has pledged to nationalize major industries and raise taxes on higher earners, and a no-deal Brexit. When it looks like the Conservatives will win a substantial majority—allowing Johnson to get a Brexit deal approved by MPs—the currency has strengthened, while polls hinting at a Labour fightback have had the opposite effect.