Expectations are on the rise that divisions over the Brexit process could lead to a general election this year, betting markets show.
As the chart below from RBC Capital Markets illustrates, the probability of an election jumped after three lawmakers opted Wednesday to leave Prime Minister Theresa May’s Conservative Party, joining a group of eight members of parliament who left the opposition Labour Party earlier this week to sit as independents.
RBC Capital Markets
Prediction markets show risk of an election this year has risen from an already elevated level of 36% to a record 44% (green line in the chart), notes RBC’s Adam Cole.
For the British pound, there are arguable negative and positive implications of a potential election, though Adam Cole, RBC’s chief currency strategist, argued in a note that negatives dominate.
An early election would presumably be fought by a different Conservative leader, he said, given May’s previous commitment not to lead the party in the next contest. That leader would likely be more euroskeptic than May.
“It is hard to argue that either an election victory for a more euroskeptic Tory party, or a Labour-led government would be anything other than negative” for the British pound, he said, though the chances of a Labour victory have fallen amid its own internal divisions.
The defections come as May attempts to salvage her exit plan by pressing reluctant EU officials for concessions sufficient to win majority support in Parliament. May heads a minority government shored up by an alliance with Northern Ireland’s Democratic Unionist Party. The Brexit process has revealed deep divisions within the Conservative Party. All three of Wednesday’s defectors had campaigned for a second Brexit referendum to cancel the June 2016 referendum that saw voters narrowly choose to leave the EU, The Wall Street Journal reported.
Those downside risks are partly mitigated, however, by the rising prospect that the U.K.’s exit from the European Union, set for March 29, could be delayed, he acknowledged. The pound has tended to rise strongly when expectations for a delay were on the rise, Cole said, but noted that the potential for that has been discounted for some time and didn’t change much on Wednesday.
Betting markets show a 34% probability that Brexit would take place in the second quarter versus 30% who see it happening on March 29.
The British pound GBPUSD, -0.0306% was little changed versus the U.S. dollar at $1.306 after a sharp jump a day earlier. The euro EURGBP, +0.0576% was up 0.1% at 86.91 pence.
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