​​​Markets prepare for Conservative win as polls play key role

GBP/USD: how the markets respond

Markets appear to be preparing for a Conservative majority, with the pound continuing to rise across the board as we enter the final stretch. As GBP/USD hits a seven-month high, there is a clear linkage between the pound and the polls. While we are seeing fluctuations from poll to poll, the general consensus appears to be that there is around a 10-basis-point gap between the Conservative and Labour parties, with the recent tightening between the two main parties abating to the relief of sterling bulls.

However, major question marks remain over the validity of these polls, with this election promising to be the most difficult to predict as traditional Labour seats shift towards the Conservatives. Huge questions remain over the size of such a shift, and to what extent tactical voting can reverse those gains back in favour of a Liberal-Labour coalition. One thing is for sure, there is likely to be huge volatility ahead for the pound, with options markets pricing in a 250-point move in GBP/USD over the course of the week.

UK stocks outlook

On the equity front, we have seen outperformance for domestically sensitive sectors such as UK banks and the housebuilders, which are likely to continue tracking the trajectory of the pound more than the FTSE 100. FTSE traders will be wary for the week ahead, with the 2016 referendum highlighting that initial GBP-FTSE synchronisation is typically short-lived as any strong sterling move is reflected in an inverse move for the FTSE 100.