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​​​​GBP/USD outlook: Brexit Party polling will play big role in GBP sentiment​​​​

While polls have their flaws, the rise or fall of the Brexit Party could be a huge determinant of sterling pricing in the weeks ahead.

​​​​GBP/USD Source: Bloomberg

Sterling has been on the rise over the course of October, with sentiment shifting dramatically in the wake of a Brexit deal between the UK and EU. Irrespective of whether this deal is viewed as great or awful for the UK economy, markets will be looking at one thing; does this avoid a no-deal Brexit?

The fear of a no-deal scenario has been a hugely detrimental for the pound, and the agreement between UK Prime Minister (PM) Johnson and Michel Barnier, the EU's chief negotiator, essentially erased the notion that a disorderly exit was the desired outcome for the new PM. Thus, Johnson’s stint can be split into two halves; before and after the deal came to light. With this in mind, we can safely say that markets perceive a Johnson victory at the polls as something that would likely result in a Brexit which will involve a transitional phase and thus, less disruption to businesses.

The opposition has certainly shown its hand on the other side of the argument, with Labour, Lib Dems and the Scottish National Party all calling for a second referendum in response to the huge developments that have come to light since 2016.

This is certainly a more positive outcome for the pound, with the huge declines seen in the wake of the referendum likely to reverse in anticipation of a potential vote to reverse that initial vote. Therefore, we are seemingly left with two outcomes, each of which will likely resolve in something that is deemed orderly and pound positive. However, why are we not seeing the pound spike sharply higher in response to this election?

Is a no-deal Brexit still possible?

Labour's Jeremy Corbyn has chosen to finally approve a December election, with the leader of the opposition stating that he needed to ensure a no-deal Brexit had been fully ruled out first. However, a no-deal exit will never be ruled out until a deal is signed or article 50 is rescinded.

While neither the Conservatives nor Labour are pushing for a no-deal, Nigel Farage has ensured that such a possibility remains an outside possibility. The Brexit Party insist that a ‘clean break’ is required to fully take advantage of Brexit, and they are likely to be seeking election throughout the country on that no-deal Brexit ticket.

Polls show shift away from Brexit Party

The GBP gains seen over recent weeks has been a reflection of two things; the emergence of a deal, and the shift away from the Brexit Party towards the Tories. While polls have been proven to count for very little in the referendum and US election, they are likely to provide a key role for markets in the absence of any better indicator. The first-past-the-post system in UK politics means that there is only so much a trader can read into the percentages in a poll. However, traders have and will likely continue to follow polls as a source of election expectations.

For the most part, the polls have shown little movement on the remain side of the argument, with the major movers coming from the Brexit Party towards Johnson’s Conservative party. However, there is a strong chance that this trend could begin to reverse to the detriment of the pound. With an election now called, Farage has taken to social media to begin undermining the deal struck by Boris Johnson with the EU. While the Brexit Party is likely to grab Leave seats from the Labour Party, they are also going to appeal to Conservatives if Farage can do a good job of convincing the electorate that Johnson’s deal is a diluted version of Brexit.

What role will the polls play in directing the pound?

The polls are likely to be absolutely crucial for traders who seek to trade the pound in the six weeks until the 12 December election. Given that the Brexit Party is the one major worry for sterling traders, there is likely to be an inverse relationship between Brexit Party polling and the pound.

The Politico poll of polls below highlights the decline in the Brexit Party vote over recent months, tallying up with the sterling recovery. That recovery is likely to continue if we see further weakness in the Brexit Party vote. However, should we see Farage seek to reverse that trend by undermining the current Brexit deal, we could see the pound held back to reflect fears over a Tory-Brexit Party coalition.

As such, while most will be looking out for shifts between the Labour and Conservative vote when each poll is released, make sure to track any shifts the in the construct of the Leave vote as a means to track sentiment for the pound.

Poll of polls

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