Analysts say June election could help Brexit negotiations but also Tory domestic policies

Prime Minister Theresa May has called a snap general election on the 8 June, depending on her gathering two thirds of MPs approval in Parliament to repeal the Fixed Term Parliament Act.

She is expected to have the support of opposition parties when she puts a motion in the House of Commons to repeal the bill on Wednesday.

May had insisted that she would not call an early election and see out the term until 2020, but has sought to increase her majority as she heads into Brexit negotiations with the EU and to take advantage of a beleaguered Labour party.

Current polls put the Conservatives 20 points ahead of Labour, but she could face opposition from a resurgent Liberal Democrat party in Remain seats and the SNP in Scotland, who are also looking to hold a second independence referendum, and not to mention the political instability in Stormont with looming direct rule from Westminster for Northern Ireland.

Analysts at Danske Bank said the euro against the dollar traded lower on the election announcement and given that very short noncommercial sterling positioning, the euro versus the pound could decline further in the very near term driven by short covering caused by higher uncertainty.

“As such, a new test, and potentially a break of the post Brexit lows around 0.83 should not be ruled out. Short-term, the general election means there is one more uncertainty factor for the pound, as the sample space for UK-EU relations have suddenly widened again with notably a chance now that Brexit may be softened (or cancelled altogether should the May government be ousted).

“Given May’s lead in the polls the most likely outcome is that she will receive the more broad-based backing she is seeking heading into the negotiations on Brexit, due to start for real post the German election in the autumn. Our base case remains that May will stay in power and negotiate a ‘decent Brexit’ (neither too hard nor too soft), but the probability of other outcomes has clearly risen with today’s election call.”

While Martin Beck, lead UK economist at Oxford Economics, said that the Conservatives are on course to achieve a three-figure majority in the June election and the chief implication of this would be that “any possibility of the UK’s exit from the EU being impeded by Parliament will almost certainly disappear” and it “could also improve policy flexibility in areas such as taxation and pensions”.

“Domestically, a new mandate would give a Conservative government the means to dispense with the more questionable policies contained in the 2015 Tory manifesto, including the ‘tax lock’, which barred rises in income tax, NICs and VAT for the duration of the parliament, and the pensions ‘triple-lock’, the inter-generational effects of which are looking ever more unjust.

“A modification of the current (and implausible) pledge to reduce annual net migration to the “tens of thousands” may also be on the cards. So the likely outcome of June’s election could provide helpful fillips to both certainty about the UK’s direction of travel post-Brexit and flexibility in domestic policy-making.”

Strategists at Deutsche Bank said that they do not see the general election as a mandate for ‘hard’ Brexit.

An expected larger Conservative majority in the House of Commons would make “the deadline to deliver a ‘clean’ Brexit without a lengthy transitional arrangement by 2019 far less pressing given that no general election will be due the year after, and it could “dilute the influence of MPs pushing for hard Brexit, strengthening the government's domestic political position and allowing earlier compromise over key EU demands for a transitional arrangement”.

The bank also said that it would strengthen May’s overall negotiating stance, which in recent weeks has fallen in line with the European negotiating approach.

“This will involve a settlement of the Brexit payments and other divorce aspects first, to be followed by a lengthy transitional period during which the final outcome of Brexit will emerge. This sequenced approach materially reduces the ‘crash risk’ of Brexit negotiations as well as strengthening the Prime Minister's hand in pursuing an orderly (and very lengthy) withdrawal.”

They said that this will in turn reduce downside risks for the UK’s economic growth outlook during Brexit negotiations.