May Still on Course to Win British Election

A week ago, I wrote about my expectation that the governing Conservative Party would easily win a large Parliamentary majority in the British General election which will be held this Thursday, 8th June.

At that time, betting shops were offering payouts on the result which implied an 8% chance of the Labour Party winning the most seats in Parliament, and a 92% chance of the Conservative Party doing the same. The odds at the time of writing now, a week later, at the same betting shop, are almost unchanged: they imply a 10% chance of the Labour Party winning the most seats, compared to a 90% chance for the Conservative Party.

It is possible for neither Party to hold a majority of seats in Parliament, known in Britain as a “hung Parliament”. This is an uncommon outcome historically, but was the situation for a year or so in the 1990s, and again from 2010 to 2015. The betting odds imply a 79% probability of a Conservative majority and an 18% chance of a hung Parliament, and a 3% chance of a Labour Party majority. Theresa_May

There are two major problems in forecasting British election outcomes: the historically bad record of political opinion polling in Britain, and the fact that local variations in voting patterns can make a very significant difference to the overall result. The former issue is highlighted by the fact that polls have been producing wildly different results. One polling organization, YouGov, has been conducting polls using an entirely new hedge-fund style machine learning technique, sampling over 50,000 voters per poll. These polls are producing small Conservative leads of approximately 4% over the past two weeks on several occasions, a result which would probably signify a hung Parliament. In the last week alone, traditional polls have produced outcomes varying from a 1% Conservative lead to a 14% Conservative lead, which would produce vastly different seat distributions. The betting market figures cited beforehand though, do point to a high-probability of a solid Conservative majority.

I still think that a hung parliament, especially one in which the Conservatives are more than 10 seats short of a majority, would lead to a sharp crash in the British Pound comparable to the aftermath of last year’s Brexit vote. A solid Conservative majority should see an upwards move, but probably not a very strong one, with a spike up to 1.31 or 1.32 at most that subsequently sells off.

An alternative to a short GBP/USD or long EUR/GBP position as a hedge to your Pounds against a failure of the Conservatives to win, could be a relatively small binary bet at a betting shop. The payout at the time of writing is more than 5 to 1 and if the Pound goes up instead, you would still benefit from it, unlike a traditional FX hedge.

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