The pound has surged after exit polls showed Boris Johnson’s Conservatives were on track for the biggest majority in more than thirty years, as investors in the City bet the outcome would lift some of the intense political uncertainty hanging over the British economy.
Immediately after publication of the exit poll, which showed the Tories were on track for a majority of 86, sterling jumped by more than two cents against the US dollar to trade at about $1.35 on the international money markets. The pound also rallied strongly against the euro, gaining by a similar amount to €1.21.
The FTSE 100 share index is expected to jump 0.74% when the stock market opens on Friday, according to futures trading.
The pound had risen earlier this week to the highest level since before Theresa May lost the Conservatives’ majority three years ago, reflecting polls showing that Boris Johnson’s party was on course for a majority.
City analysts had largely expected a Tory majority.
In recent weeks sterling has tended to rally when the opinion polls have pointed towards a Tory victory, while the prospect of a hung parliament and the elevated levels of political uncertainty it would bring has put pressure on the currency.
However, both major parties have pledged a rise in government spending, a decisive shift that should increase the size of the economy, put upward pressure on interest rates and fuel an increase in the value of the pound.
While investors in the currency markets have largely focused on the dynamics of the election, the withdrawal agreement passing through parliament and progress in the subsequent trade negotiations will also determine the outlook for the pound over the longer term.
Significant uncertainty over Brexit remains reflected in the currency, which has not come close to returning to its value on the eve of the EU referendum three years ago. Sterling has tended to fall on the prospect of tougher trade barriers and gained on news of closer ones.
Chris Beauchamp, the chief market analyst at financial trading firm IG, said: “A tough few months, and maybe even years, of negotiation lie ahead, but at least now the UK government knows it has the will of the people and parliament behind it. UK assets may now finally play catch-up with the rest of the world, as investors return to the country.”
Traders in the City had been expecting that a Labour victory would likely mean “short-term pain, potential long-term gain” for the pound, believing that sterling could fall by as much as 4% if Jeremy Corbyn’s party performed better than expected in the polls. Several business groups have expressed concern over the party’s plans for the economy.
Despite the early movements in sterling on Thursday night as the City digested the significance of the exit polls, developments in Westminster throughout Friday and into the weekend will likely have a continued impact.
