In less than 24 hours the British electorate will start voting in the election for the 650-seat House of Commons with the result expected early in the morning of Friday 9th June. While the last general election was only held two years ago, there is arguably as much if not more at stake this time round than in May 2015. Opinion polls still point to the ruling Conservatives winning a record-high 44% of the national vote ahead of the opposition Labour Party, but polling agencies which in the past have misestimated true voting intentions still display great inconsistency. Ultimately it is the number of seats which British parties command which matters and the UK’s first-past-the-post electoral system makes it difficult to predict. You Gov’s constituency-specific model forecasts the Conservatives winning only 304 seats as a result of a record number of “wasted” votes, a 26-seat loss and well short of both a working and absolute majority. Labour would increase its seat numbers from 229 to 266. This would result in a hung parliament and either a coalition or minority government. My own model points to the Conservatives winning around 360 seats (55.4% of total) and Labour 212 seats. Admittedly, this prediction is based on a number of assumptions, namely the net share of votes which Conservatives gain from other parties as well as voter turnout. Whether the Conservatives significantly improve on their current 330 seats or fail to secure a parliamentary majority remains a tough call and there is an almost infinite number of possible outcomes. However, I have narrowed down in Figure 10 the number of seats the Conservatives could win to eight possible scenarios, in each case assessing i) Their probability; ii) Their numerical impact on the Conservatives’ majority (or lack thereof); and iii) The risk of opposition parties and/or Conservative backbenchers high-jacking the policy agenda. Figure 11 assesses for each of the eight scenarios their likely impact on iv) Theresa May’s standing within the Conservative Party and v) Sterling and currency volatility. Regardless of what happens tomorrow, two events beyond British shores also scheduled for 8th June – the ECB’s policy meeting and Former FBI Director James Comey’s testimony to the Senate Intelligence Committee – will conceivably exacerbate Sterling volatility.

1. 1
UK General Election Scenario Analysis
Impact on Policy, Theresa May and Sterling
In less than 24 hours the British electorate will start voting in the election for the 650-seat
House of Commons with the result expected early in the morning of Friday 9th June.
While the last general election was only held two years ago, there is arguably as much if
not more at stake this time round than in May 2015.
Opinion polls still point to the ruling Conservatives winning a record-high 44% of the
national vote ahead of the opposition Labour Party, but polling agencies which in the past
have misestimated true voting intentions still display great inconsistency.
Ultimately it is the number of seats which British parties command which matters and the
UK’s first-past-the-post electoral system makes it difficult to predict.
You Gov’s constituency-specific model forecasts the Conservatives winning only 304 seats
as a result of a record number of “wasted” votes, a 26-seat loss and well short of both a
working and absolute majority. Labour would increase its seat numbers from 229 to 266.
This would result in a hung parliament and either a coalition or minority government.
My own model points to the Conservatives winning around 360 seats (55.4% of total) and
Labour 212 seats. Admittedly, this prediction is based on a number of assumptions, namely
the net share of votes which Conservatives gain from other parties as well as voter turnout.
Whether the Conservatives significantly improve on their current 330 seats or fail to secure
a parliamentary majority remains a tough call and there is an almost infinite number of
possible outcomes.
However, I have narrowed down in Figure 10 the number of seats the Conservatives could
win to eight possible scenarios, in each case assessing i) Their probability; ii) Their
numerical impact on the Conservatives’ majority (or lack thereof); and iii) The risk of
opposition parties and/or Conservative backbenchers high-jacking the policy agenda.
Figure 11 assesses for each of the eight scenarios their likely impact on iv) Theresa May's
standing within the Conservative Party and v) Sterling and currency volatility.
Regardless of what happens tomorrow, two events beyond British shores also scheduled
for 8th June – the ECB’s policy meeting and Former FBI Director James Comey’s testimony
to the Senate Intelligence Committee – will conceivably exacerbate Sterling volatility.

2. 2
Less than 24 hours until UK elections…and still many possible scenarios and implications
In less than 24 hours, and only five days after the tragic terrorist attack in London, the British electorate will
start voting in the election for the 650-seat House of Commons (lower house of parliament), with the result
– based on precedent – expected early in the morning of Friday 9th
June (see Figure 1).
Figure 1: British election result expected Friday morning
Source: Electoral Commission
While the last general election was only held two years ago, there is arguably as much if not more at stake
this time round than in May 2015, including whether:
1. Ruling Conservative Party leader and Prime Minister Theresa May – who was elected in a party vote in
July – can secure a strong popular mandate;
2. The conservative Party, which currently has 330 seats, will win or lose seats in the face of a resurgent
opposition Labour Party (see Figure 2); and
3. The winning party (or indeed coalition), which will negotiate with European Union (EU) leaders the terms
and conditions of the UK’s exit from the EU and of the UK’s new deal with the EU, will enjoy a significant
popular and parliamentary mandate.
UK Election Timetable (local times)
Thursday 8 June 07:00 Polling stations open (many will have already voted via postal ballot)
22:00 Polling stations close
22:00 First exit polls expected
23:00 First official constituency results expected
Friday 9 June 02:30 Islington North (London) constituency of Labour Party leader Jeremy
Corbyn to declare result
04:00 Maidenhead (Berkshire) constituency of Conservative Party leader
Theresa May to declare result
Morning Leader of winning party traditionally waits for losing party's leader to
concede defeat before claiming victory
13:00 Last constituency expected to declare

3. 3
Figure 2: Conservatives currently have 330 seats – 101 more than Labour – and looking to widen the gap
Source: House of Commons
Opinion polls still point to Conservatives being ahead of Labour but great inconsistency
Opinion polls point to a trend-fall in popular support for the Conservatives to around 44% and sharp rise for
Labour to 36%, with the gap between the two main parties falling to about 8 percentage points (pp) from
22pp six weeks ago (see Figure 3). Aggregate support for the Liberal Democrats, UKIP, SNP and Green
Party has inched higher to around 19% but has remained below 20% since mid-May.
Importantly, these polls exclude votes for i) the four Irish Northern Ireland Parties which are assumed to
again 18 seats and roughly 2% of the national vote and ii) other smaller parties (including the Welsh Plaid
Cymru party) and independent candidates which won 1.6% of the national vote in 2015. Assuming that this
3.5% of votes is proportionally subtracted from the main parties’ votes, the Conservatives would be on
about 42.5% and Labour on 34.7%.
Party Note Brexit stance Seats % of seats
Conservatives In government Mainly pro-Brexit but spectrum of views
from anti-Brexit to 30 eurosceptics
330 50.8
Labour Main opposition party Pro-EU but majority of MPs voted in favour of
bill allowing government to trigger Article 50
229 35.2
SNP Scottish Party Pro-EU 54 8.3
Liberal Democrats Pro-EU 9 1.4
DUP Northern Ireland Party Tacit support for Brexit 8 1.2
Sinn Fein Northern Ireland Party Pro-EU 4 0.6
SDLP Northern Ireland Party Pro-EU 3 0.5
Plaid Cymru Welsh Party Pro-EU 3 0.5
Ulster Unionists Northern Ireland Party Tacit support for Brexit 2 0.3
Independents Includes 1 Northern Ireland
MP and 1 former UKIP MP
5 0.8
UKIP Pro-Brexit 0 0.0
Green Pro-EU 1 0.2
Speaker Conservative, does not
vote in parliament
1 0.2
Vacant 1 0.2
Total 650 100
Composition of House of Commons before it was dissolved on 3 May 2017

4. 4
Figure 3: Polls point to collapse in gap between the ruling Conservative and opposition Labour party
Source: BBC Poll Tracker
Should the Conservatives win 44% of valid votes, this would be the highest ratio in decades – a point which
the press has seemingly failed to comment on. Even if the Conservatives won 42.5% of the vote, this would
be the best performance by a winning party in 20 years. Labour’s 34.7-36% of the vote would broadly
equate to the share of votes which the Conservatives won in 2005 and 2010 and which Labour under Tony
Blair won in 2005 (see Figure 4)
Figure 4: Polls point to Conservatives winning a record high share of the national vote
Source: Electoral Commission
Note: * Conservatives were short of a parliamentary majority and formed a ruling coalition with the Liberal Democrats
0
5
10
15
20
25
30
35
40
45
50
18/01 02/02 17/02 04/03 19/03 03/04 18/04 03/05 18/05 02/06
Conservatives Labour
Liberal Democrats UKIP
Green SNP
Conservative-Labour gap (pp)
Opinion polls, 7-day rolling average, % of national vote
Prior general elections - Winning party's share of national vote and voter turnout
Year Ruling Party Votes won (%
of valid votes)
Turnout (valid votes as %
of registered voters)
Votes won (% of
registered voters)
1979 Conservative 43.9 76.0 33.4
1983 Conservative 42.4 72.7 30.8
1987 Conservative 42.2 75.3 31.8
1992 Conservative 41.9 77.7 32.6
1997 Labour 43.2 71.4 30.8
2001 Labour 40.7 59.4 24.2
2005 Labour 35.2 61.4 21.6
2010 Conservative* 36.1 65.1 23.5
2015 Conservative 36.9 66.0 24.4
Average 40.3 69.4 28.1

5. 5
However, there is still great discrepancy amongst polling agencies (see Figure 5), which in the past have
misestimated true voting intentions (see UK Election Special – When Two Tribes Go To War, 2 June 2017).
For example, while the latest poll by ICM conducted on 4th
June has the Conservatives on 45% and Labour
on 34%, the latest Survation poll (3rd
June) has the gap at only one percentage point with the
Conservatives on 40% and Labour on 39%.
Figure 5: Still a lot of noise in popular opinion polls around the size of the Conservative’s lead
Source: BBC Poll Tracker
You Gov predicts Conservatives will fail to translate large popular vote into large number of seats
While political parties in the UK (and the US1
for that matter) have in the past highlighted their share of the
national vote, it is the number of seats which British parties command in the House of Commons which
ultimately matters. The challenge is that the UK’s first-past-the-post electoral system makes it difficult to
translate share of votes into actual seat numbers.
You Gov, as of 5th
June, had the main parties polling broadly in line with the other polling agencies (see
Figure 7). Moreover, their constituency-specific model forecast:
 Conservatives winning only 304 seats, a 26-seat loss and well short of both a working government
and absolute majority (see Figure 6);
 Labour increasing its seat numbers from 229 to 266; and
 The main other parties seeing only negligible swings in their seat numbers.
1 In the 2016 US presidential elections Donald Trump won the collegiate vote (and was elected president) despite
winning only 46% of the popular vote
0
10
20
30
40
50
60
15/01 04/02 24/02 16/03 05/04 25/04 15/05 04/06
SNP Conservatives Labour Liberal Democrats UKIP Green
Opinion polls, % of national vote

6. 6
This would result in a hung parliament and in all likelihood the Conservatives and Labour would separately
try to cobble a coalition with one or more other parties in order to secure a working majority and form a
government. However, You Gov estimates that its forecast margin-of-error is a sizeable 30% with the
Conservatives winning anything from 265 to 342 seats.
Figure 6: You Gov predicts that Conservative Party will lose its parliamentary majority
Source: You Gov, House of Commons
What stands out is that You Gov is forecasting the share of seats won by the Conservatives, Labour and
SNP to be only slightly higher than the share of the national vote that You Gov (and other polling agencies)
expect. Conversely, the Liberal Democrats would win a smaller share of the seats than suggested by their
polled share of the national vote (see Figure 7).
0
50
100
150
200
250
300
350
You Gov Forecast (6 June 2017) At present
Number of seats in House of Commons
Absolute majority: 326 seats

7. 7
Figure 7: You Gov predicts Conservatives’ share of seats to be broadly in line with its share of votes...
Source: You Gov, BBC Poll Tracker
Note: * Northern Ireland parties not included in You Gov national opinion poll; **NorthernIreland parties, Plaid Cymru,
other smaller parties and independent candidates not included in UK-wide national opinion polls, Average of the most
recent seven opinion polls.
If You Gov’s forecast proves accurate it would represent a significant break in the historical relationship
between the share of the national vote won by the winning party and runner-up and their share of the
House of Common seats. Figure 8 shows that on average, in the past nine general elections, the winning
party has won 40.3% of the national vote but a far larger 55.9% of the seats – a significant gap of 15.6pp
which has never fallen below 9.5pp (in 1979) and was as high as 22pp in 2001.2
In tomorrow’s election, however, You Gov predicts that the Conservatives will, by historical standards, win
a large share of the national vote (42%) but a record-low share of the seats (46.8%). The gap between the
two measures of 4.8pp would be considerably lower than the historical average of 15.6pp. Put differently,
You Gov predicts that many of the votes won by the Conservatives will be “wasted” 3
and that effectively,
for the first time in decades, the election outcome will resemble that of an election run under a Proportional
Representation (PR) electoral system.
2 This has led to smaller parties challenging the merits and fairness of the first-past-the-post electorate system.
3 Remember that under a winner-takes-it all, first-past-the-post electoral system a candidate is elected MP regardless
of his/her margin of victory
0
10
20
30
40
50
You Gov forecasted share of seats (% of total)
You Gov national poll (share of national vote)*
Other national polls (share of national vote)**

8. 8
Figure 8: …which would represent a clear break with history
Source: You Gov, BBC Poll Tracker
Note: C denotes Conservatives,L denotes Labour; * Conservatives were short of a majority (306 seats) and formed a
ruling coalition with Liberal Democrats; ** You Gov forecast of number of seats and average of polls for share of the
national vote won
Forecast for Conservatives to win 360 seats – A modest gain of 30 seats
My own model points to the Conservatives winning around 360 seats – a net gain of 30 seats (the cross-
over point of Scenarios 2 and 3) and Labour winning 212 seats (a loss of 17 seats). This would translate to
the Conservatives winning 55.4% of the seats, a marginally lower-than-average share (see Figure 8), while
Labour would win 32.6% of the seats.
However, this prediction is based on a number of assumptions, namely the net share of votes which
Conservatives gain from other parties as well as voter turnout. Specifically, I assume that Conservatives
will win seats from:
1. Labour
Conservatives are likely to win some marginal seats currently held by Labour in the North and Midlands
where the electorate voted in favour of Brexit. In the 2015 elections Labour won 43 seats (out out of 232)
with a margin of victory over the Conservatives of less than 10% of the overall votes (see Figure 9).
The swing in votes from Labour to Conservatives could be particularly large if voter-turnout for those aged
under 30 – who in their majority support Labour according to recent polls – is true to history and remains
low. The weather forecast for Thursday is cloudy with possible rain which could deter less committed voters
and at the margin favour the Conservatives (poor weather on 23rd
June arguably contributed to a still
30
35
40
45
50
55
60
65
70
1979 C 1983 C 1987 C 1992 C 1997 L 2001 L 2005 L 2010 C* 2015 C 2017**
Votes won (Average: 40%) Seats won (Average 56%)
Winning party in prior elections: Votes and seats won (% of total)

9. 9
modest voter turnout of 72% at the EU referendum, which in turn likely aided the Leave vote – see UK
Referendum: Blame the weather, not Brussels, 23 June 2016).
The Conservatives may also lose some seats to Labour – after all the Conservatives won 43 seats (out of
330) with a margin of victory over Labour of less than 10% of the overall votes. However, in net terms I
would expect Labour to be the loser.
Figure 9: Conservatives and Labour won a number of marginal seats in 2015 now potentially up for grabs
Source: Electoral Commission
2. UKIP
UKIP has been in turmoil and arguably shed much of its purpose since the British voted in favour of Brexit
in the 23rd
June EU referendum and I would expect a significant share of UKIP supporters to vote
Conservative. While UKIP only won a unique seat in the 2015 elections it came third with 12.6% of the
national vote. If we assume the same distribution of seats as in 2015 and that the Conservatives win 50%
of UKIP votes, Conservatives would increase their seats by 37 to 367.
However, it is conceivable that Labour may also take some votes from UKIP. While the two parties are at
opposite ends of the political spectrum regarding the UK’s membership of the EU, they both share populist
platforms (a situation not too dissimilar to the recent French presidential elections where National Front
candidate Marine Le Pen lost some votes in the first round to the far left candidate Jean-Luc Mélenchon).
3. SNP
Polls suggest that the SNP has lost some traction and that it may lose a few seats to the Conservatives. My
analysis broadly tallies with You Gov’s recent poll which forecasts that the SNP would win only 46 seats (a
loss of 8 seats).
0
10
20
30
40
50
60
70
80
90
1 26 51 76 101 126 151 176 201 226 251 276 301 326
Conservatives (330)
Labour (232)
Conservatives and Labour, 2015 election
Number of seats won
GapbetweennumberofLabour&Conservative
votes,%oftotalvalidvotes

10. 10
My analysis is also broadly in line with You Gov in forecasting a broadly unchanged number of seats for the
Northern Irish parties (18), Liberal Democrats (nine), Plaid Cymru (three) and the Green Party (one).
Eight possible scenarios to cater for still tough-to-call election result
Whether the Conservatives significantly improve on their current 330 seats or fail to secure a parliamentary
majority, as You Gov currently predicts, remains a tough call. There is arguably an almost infinite number of
possible outcomes with regards to seat-distribution. However, I have narrowed down in Figure 10 the
number of seats the Conservatives could win to eight possible scenarios, in each case assessing:
i) Their probability;
ii) Their numerical impact on the Conservative Party’s absolute and working government majority
(or lack thereof); and
iii) The risk of opposition parties and/or Conservative backbenchers high-jacking the policy agenda.
Figure 10: Election impact on Conservative majority and influence of party rebels and opposition
Source: House of Commons, various
Scenario Probability After election Change
from
current
Absolute
majority
Government
majority
Risk of opposition and/or
Conservative backbenchers
highjacking policy agenda
1 Very low >400 > +70 > 74 > 157 Virtually nil
2 Modest 360-400 30-70 34-74 77-157 Low to moderate
3 Modest 331-359 1-29 5-34 19-75 High
4 Modest 330 0 4 17 High
5 Modest 326-329 -1 to -4 0-3 9-15 Very high
6 Low 322-325 -5 to -8 1 to 4 seats
short
1-7 Very high
7 Low <322 (but more
seats than Labour)
< -8 More than 4
seats short
More than 1
seat short
Near certainty
8 Very low Fewer than Labour ??? No No Possibility that Labour form
ruling coalition
Number of seats in House of Commons

11. 11
Figure 11 assesses for each of the eight scenarios their likely impact on:
iv) Theresa May's standing within the Conservative Party and;
v) Sterling and currency volatility
Figure 11: Election impact on Theresa May’s standing and Sterling (and its volatility)
Source: House of Commons, various
Scenario Analysis – Impact on absolute and working government majority
In order to win an absolute majority – i.e. 326 seats – the Conservatives can afford to lose four seats.
However the “working government majority” (or simply working majority) is arguably the more relevant
metric, reflecting the ability of the ruling party (or coalition) to command voting majorities and thus to
govern. The Conservatives currently enjoy a working of majority of 17 seats, calculated as Conservative
Members of Parliament (MPs) less all other parties but excluding MPs who typically don’t vote in
Scenario Probability Number of
seats in House
of Commons
Impact on Theresa May's standing Impact on Sterling
1 Very low >400 Decision to hold early elections strongly vindicated Sharp (albeit probably
short-lived)
appreciation
2 Modest 360-400 Decision to hold early elections vindicated Appreciation
3 Modest 331-359 Modest pressure for her to resign Little change
4 Modest 330 Pressure for her to resign Modest depreciation
5 Modest 326-329 Acute pressure for her to resign Depreciation
6 Low 322-325 Acute pressure for her to resign Depreciation
7 Low <322 (but more
seats than
Labour)
Near-term modest pressure for her to resign
(Conservatives to prioritise government formation),
long-term acute pressure for her to resign
Sharp depreciation
followed by potential
recovery
8 Very low Fewer than
Labour
Near-term modest pressure for her to resign
(Conservatives to prioritise government formation),
long-term acute pressure for her to resign
Very sharp
depreciation followed
by potential recovery

12. 12
parliament4
. In order to secure a working majority the Conservative Party would have to win at least 322
seats or so (put differently they would have to lose no more than eight seats).
Scenario 1: Conservatives win more than 400 seats
This would arguably qualify as a crushing landside victory with the Conservatives winning more than 61.5%
of the seats – a new record for the Conservatives which in the past 45 years have never won more than
61.1% (Margaret Thatcher in 1983 elections – see Figure 12). If the Conservatives won more than 412
seats or 63.4% of the seats they would beat the record set by the Labour Party under Tony Blair in 1997.
Figure 12: The 1983 and 1997 elections are, respectively, the benchmarks for Conservatives and Labour
Source: Electoral Commission
Note: * Number of seats fluctuated in elections from 1970 to 2005 due to boundary changes but has been constant at 650
since 2010 election.
Scenario 2: Conservatives win 360-400 seats
This would arguably qualify as a landslide victory. At the lower end (360 seats), the Conservatives would
win 55.4% of the seats and a working majority of 77 seats, broadly in line with the long-run averages (see
4 These are the Speaker of the House (who resigns from his/her party, at present the Conservative Party), the three
Deputy Speakers (currently two Labour, one Conservative) who don’t resign from their parties and the four Sinn Fein
MPs who do not sit in Parliament as they do not recognise its legitimacy. 330 minus 313 (320 minus 3 minus 4)
equates to 17-seat government majority.
Prior general elections - Size of majority and turnout
Year Ruling Party/Coalition Seats won* % of seats
won
Government working
majority (seats)
Turnout (valid votes as %
of registered voters)
1970 Conservative 330 52.4 33 72.0
Feb '74 Labour (minority government) 301 47.4 -30 78.8
Oct '74 Labour 319 50.2 6 72.8
1979 Conservative 339 53.4 43 76.0
1983 Conservative 397 61.1 148 72.7
1987 Conservative 376 57.8 106 75.3
1992 Conservative 336 51.6 24 77.7
1997 Labour 418 63.4 182 71.4
2001 Labour 413 62.7 174 59.4
2005 Labour 355 55.0 72 61.4
2010** Conservative + Liberal Democrats 363 55.8 84 65.1
2015 Conservative 330 50.8 17 66.0
Average 55.1 72 70.7

13. 13
Figure 12). At the upper end (400 seats), the Conservatives would win 61.5% of the seats and a working
majority of 157 seats – their best performance in recent history.
Scenarios 3 and 4: Conservatives win 330-359 seats
Conservatives would maintain their absolute and working majorities and in a best case scenario increase
them to respectively 33 and 75 seats.
Scenarios 5 and 6: Conservatives win 322-329 seats
Conservatives could lose their absolute majority and their working majority would shrink to as low as 1 seat.
Scenario 7: Conservatives win fewer than 322 seats but more seats than Labour
Conservatives would lose both their absolute and working majorities and have to try and form a majority
coalition with one or more other parties – no easy feat as few, if any, of the other parties are likely to have
both a significant number of seats and a natural affinity with the Conservatives.
 For starters the main opposition parties, including the Scottish National Party (SNP), Liberal
Democrats, Plaid Cymru and two of the four Northern Irish parties – Sinn Fein and the Social
Democratic and Labour Party (SDLP) – favour the UK remaining within the EU. This is contrast to
Conservative MPs who, with the exception of Kenneth Clarke, all voted in favour of the Brexit bill
back in February (even if a sizeable number did so reluctantly given that their constituents had
voted in favour of remaining in the EU in the 23rd
June referendum).
 The SNP which is expected to win 45-50 seats has been at loggerheads with the Conservatives.
 The Liberal Democrats (expected to win 9-12 seats) would be reluctant to join a Conservative Party-
led coalition given how badly they fared under such an arrangement in 2010-2015.
 The United Kingdom Independence Party (UKIP) is a staunch supporter of Brexit and reduced
immigration into the UK and could arguably join a Conservative coalition. However, it is on course to
win at best only a couple of seats and thus would be of little value to a Conservative Party well short
of a parliamentary majority.
 The other two Northern Irish parties – the Democratic Unionist Party (DUP) and Ulster Unionists –
have given their tacit support to Brexit. They are likely to retain a combined 10 seats in the House of
Commons and could conceivably side with the Conservatives in key votes. But they would not
formally join a ruling coalition, their 10-seats may prove numerically insufficient and their support
would likely be conditional.
If both the Conservatives and Labour failed to create a working majority coalition, the Conservatives would
likely try to govern as a minority party, with the associated risk of policy-gridlock and another early election.
Scenario 8: Conservatives win fewer seats than Labour
Labour would be in a commanding position to try and form a majority coalition with, depending on how
many seats they were short, one or more parties including the SNP, Liberal Democrats and Plaid Cymru

14. 14
(the latter is expected to win 2-3 seats). All three parties share a pro-EU stance with Labour while Labour
and the Liberal Democrats are reasonably well aligned in terms of tax policies. Jeremy Corbyn has so far
stopped well short of confirming a possible two let alone three-way government but the lure of being in
power would likely be too strong to resist.
Scenario analysis – Risk of opposition and/or Conservative backbenchers highjacking
policy agenda
In order for Theresa May to have carte blanche to conduct policy on her own terms I estimate that the
Conservative Party would likely have to win at least 360 seats – what I term a “true” working majority.
Approximately 30 backbench Conservatives MPs are staunch eurosceptics in favour of a hard version of
Brexit who have in the past rebelled and voted against the government. Moreover, a number of
Conservative MPs have in the past abstained in key parliamentary votes.
Stripping out these 35 or so MPs would leave Theresa May with about 325 MPs (i.e. a narrow working
majority) likely to support her policy agenda, which may include a softer version of Brexit – namely UK
membership of the Customs Union and a tapered budget contribution to the EU budget in exchange for
increasing control over EU immigration into the UK.
Moreover, a significant majority would make it easier for Theresa May to force through the Boundary
Reform Act – the periodic re-drawing, to account for demographic changes, of the constituency boundaries
defining the geographic area represented by each MP. Although Conservatives would likely be net gainers
from this Act, some Conservative MPs would likely lose their seats and thus vote against such an Act. With
a large parliamentary majority, Theresa May would stand a good chance of getting this Act through
parliament, which would in turn further marginalise MP “outliers”.
Scenario analysis – Impact on Theresa May's standing as party leader and Prime Minister
Theresa May on 18th
April called for an early election, which parliament green-lighted the following day,
despite having previously mothballed the possibility of bringing forward elections scheduled for May 2020.
The motivations behind her u-turn were arguably four-fold:
(1) Win a popular rather than party mandate;
(2) Capitalise on the massive lead in the polls the ruling Conservatives enjoyed over the opposition
Labour Party and thus allow her to push through her own agenda, including a possibly softer form of
Brexit and Boundary Reform Act (see above);
(3) Allow the government more time to secure a new EU trade deal; and
(4) Strengthen the government’s stance in negotiations with the EU.

15. 15
While objective (4) is in my view at best tenuous, Theresa May ultimately took a gamble (undoubtedly
calculated) about her political future and arguably has much to lose or gain from Thursday’s vote.
Scenarios 1 and 2: Conservatives significantly increase their majority
Theresa May’s decision to call an early election would clearly be vindicated. She would have a strong
popular mandate and perhaps more importantly the parliamentary platform necessary to push through her
own policy agenda. Her position as Conservative Party leader and Prime Minister would likely be reinforced
after a shaky election campaign which exposed her weaknesses and that of the Conservative manifesto.
Scenario 3: Conservatives increase seats by fewer than 30, fail to secure “true” working majority
Theresa May would likely argue that her decision to trigger early elections was justified. However,
opposition parties and some Conservative MPs (who may have seen their constituency majority shrink)
could argue that this two-month campaign was a wasted opportunity and a pointless source of distraction at
a time when the government should be focusing on Brexit, a stuttering economy and the threat of terrorism.
While Theresa May would be expected to remain in power, a leadership challenge could not be excluded.
Scenarios 4, 5 and 6: Conservatives fail to gain any seats or even lose their slim absolute majority
The pressure for Theresa May to resign would likely be more acute. The Prime Minister would at best have
nothing to show for in exchange for putting the electorate, political parties and government through a third
major vote in less than two years and at worst would have weakened her party’s authority.
A low voter turnout would compound the view that Conservatives and Theresa May have a weak popular
mandate. Even if the Conservatives won a record 44% of the national vote, with a voter turnout of only 60%
Conservatives would in effect win only 26.4% of the national vote – lower than an average of 28.1% for the
winning party in the previous nine elections (see Figure 4).
Scenarios 7 and 8: Conservatives fail to win working majority or in more extreme scenario win
fewer seats than Labour Party
The near-term risk of the Conservatives holding a party-leadership election may, somewhat perversely, be
more modest than in Scenarios 4-6. The reasoning is that the Conservatives would be under pressure to
beat Labour in forming a majority coalition government and may not want the added distraction of a
leadership-election which could leave the country rudderless. Medium-term, however, Theresa May’s
position would very likely be reviewed.
Scenario analysis: Impact on Sterling and volatility
Sterling has been particularly stable in the past seven sessions, with the Nominal Effective Exchange Rate
(NEER) currently in the middle of a 6%-wide range in place since early November according to my
estimates (see Figure 13).

16. 16
Figure 13: Sterling NEER in the middle of a 7-month range as we head into potentially turbulent times
Source: Bank of England, investing.com
Sterling volatility has indeed been very subdued in recent months when measured against the US Dollar
(see Figure 14) and Euro (see Figure 15) although there is evidence of financial markets hedging
themselves via put options against a sharp Sterling sell-off.
Figure 14: Daily changes in GBP/USD have been
subdued…
Figure 15: …and it is a similar picture for GBP/EUR
Source: investing.com Source: investing.com
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan 13 Nov 13 Sep 14 Jul 15 May 16 Mar 17
10-day standard deviation in daily % change in
GBP/USD
EU referendum
(23/06/2016)
0.0
0.5
1.0
1.5
2.0
2.5
Jan 13 Nov 13 Sep 14 Jul 15 May 16 Mar 17
10-day standard deviation in daily % change in
GBP/EUR
EU referendum
(23/06/2016)
90
95
100
105
110
115
120
Apr 15 Aug 15 Dec 15 Apr 16 Aug 16 Dec 16 Apr 17
Sterling Nominal Effective Exchange Rate (23 April 2010 = 100)
Refere ndum date confirmed
Refere ndum
"flash crash"
Theresa May accounces
early election7 May general elections

17. 17
Scenarios 1 and 2: Marked but likely short-lived Sterling appreciation
I would expect pronounced appreciation, particularly in the event of Scenario 1 (an indisputable landslide
victory for the Conservatives). The main positive for Sterling would be financial markets’ belief that the
Prime Minister’s lustre has been at least partly restored, that a source of domestic political uncertainty has
been removed and importantly that the odds of a hard Brexit and/or disorderly exit from the EU have
narrowed. However, any Sterling rally is unlikely to become entrenched, in my view, for four reasons.
First, while a large government majority would give Theresa May and the Conservatives full control over the
domestic policy agenda, it would arguably have more to do with the paucity of the opposition Labour Party
than with the Conservatives’ assured performance in recent months.
Second, the odds of the government securing an advantageous EU deal would probably not improve much
as I discussed in UK Election Special – When Two Tribes Go To War (2 June 2017). If anything, the past
two months have reinforced my view, first set out in The A-team had a plan, the British government has a
nebulous goal (13 December 2015) that the government is ill-equipped, ill-prepared and lacking in
institutional capacity to negotiate complex deals with the EU and non-EU partners
Third, markets are likely to return their attention to protracted and complex negotiations with the EU which
are due to start on 19th
June and the economic realities facing the government. There are signs that Brexit-
related uncertainty, higher inflation, a lack of export competitiveness and large current account deficit,
lacklustre productivity growth, a record-low household savings rate and terrorist threat are hampering
output, demand and overall GDP growth (see US, UK and global GDP growth update – Put the champagne
on ice, 28 April 2017).
Finally, the Conservatives by their own admission are operating within tight fiscal constraints and their
scope to cut overall tax rates and push through market-friendly policies is at best very limited, in my view.
The risk, if any, is that tax rates rise marginally, although they would in aggregate remain well below the
levels proposed by Labour if elected.
Scenarios 3 & 4: Risk of Sterling depreciation, likely higher volatility
If the Conservatives fail to materially increase their seat numbers (Scenario 3) or worse remain stuck on
330 seats (Scenario 4), I see a clear risk of (albeit) modest depreciation and heightened Sterling volatility.
On the upside markets may welcome increased Conservative control over the domestic agenda (even if
modest). However, such an outcome would do little to reassure markets that Theresa May can keep
eurosceptic MPs in check or that the government has the ability to quickly conclude trade deals with the EU
and non-EU partners.
Scenarios 5 & 6: Sterling depreciation, higher volatility
Under these two scenarios Sterling is likely to weaken more markedly. Rebel Conservative MPs would
have significant scope to push for hard Brexit while opposition parties would potentially be in a position to
stall government policies (particularly under Scenario 6). I would expect Sterling volatility to spike as
markets grapple with the implications of a diminished Conservative majority and possible talk of a
leadership challenge within the party.

18. 18
Scenarios 7 & 8: Sharp sell-off but potentially short-lived, high volatility
In the event of neither Labour nor the Conservatives winning a majority – a hung parliament – the
immediate knee-jerk reaction would likely be a sharp sell-off in Sterling and jump in volatility. Sterling could
conceivably weaken to (and below) the low-end of its multi-month range (see Figure 13).
For starters, markets are unlikely to welcome the prospect of a potentially drawn-out coalition-building
process and it would raise serious questions about the leadership qualities of Jeremy Corbyn and in
particular Theresa May.
Moreover, there would likely be concerns about the shelf-life of a coalition government and its ability to
push legislation through parliament (i.e. policy paralysis). This concern is likely to be particularly acute with
regards to a coalition government’s ability to successfully negotiate a favourable deal with the EU – a body
with arguably vast institutional capabilities. Finally, in the event of Labour forming a government, markets
would likely have concerns about Corbyn’s inner circle (given a recent spate of poor performances by
shadow cabinet members), the impact of tax-and-spend policies and a potentially softer stance on terrorism
and domestic security.
However, I also see scope for Sterling’s likely downturn to fade and even reverse in due course whether
the Conservatives or Labour lead a coalition government.
Conservative-led coalition government
A Conservative-led coalition government with a small majority would likely have to adopt a more
consensual stance on policy, including Brexit, in order to partly neutralise the opposition vote and get
parliament to approve policies. This may in turn help mitigate the risk of the UK walking away from EU
negotiations without a deal, even if transitional, in place. At the very least it may force Theresa May to be
more transparent and detailed in her presentation of policy.
Labour-led coalition government
Theresa May has done little to prove she is a safe pair of hands (including on domestic security), her
political campaign was long on u-turns and platitudes and short on policy details (in particular with regards
to Brexit), GDP growth has slowed and public services are under pressure. Taxes under a Conservative
government would be lower than under Labour but the government’s apparent failure to accurately cost its
manifesto is far from reassuring.
Importantly, Theresa May has failed to clearly spell out what format she envisages for Brexit (and been
particularly vague on immigration), has left open the possibility of walking away from EU negotiations with
no deal in place and, along with the cabinet, shown little evidence at this stage that they can secure an EU
deal which leaves the UK better off in aggregate terms.
Conversely, Corbyn has made clear that he favours tariff-free access to the European Single Market (which
tends to be a market-pleaser) and seems in exchange willing to accept some EU immigration. The more
conciliatory, pro-EU approach that French President Emmanuel Macron has espoused has worked well for
the euro and France's image (not that I am in making a direction comparison between Macron and Corbyn).

19. 19
To be clear, a V-shaped Sterling recovery would likely remain elusive. After all financial markets generally
distrust inherently less stable coalition governments and whomever is in power will have to deal with a
trifecta of challenges – lacklustre economic growth, likely tortuous and drawn-out EU negotiations and the
omnipresent threat to domestic security. However, the seemingly-held assumption that a hung parliament
and/or a Corbyn premiership would usher in a protracted period of acute Sterling and financial market
weakness may well be challenged.
Key events beyond British election likely to impact Sterling and volatility
Regardless of what happens in Thursday’s general election, two events beyond British shores also
scheduled for 8th
June will conceivably exacerbate Sterling volatility (see Figure 16).
 European Central Bank (ECB) policy meeting. It remains unclear whether the ECB’s language on
forward guidance will be tweaked to reflect signs that eurozone growth is gaining momentum or whether
the bank will stand pat in the face of still modest inflationary pressures and a stronger euro. The former
is somewhat more likely, in my view, which would in turn lean against any gains in the GBP/EUR cross
(or accentuate any downside pressures).
 Former FBI Director James Comey to testify to the Senate Intelligence Committee. Comey is
expected to elaborate on whether US President Trump tried to stymie his investigation into alleged links
between Russia and Trump’s administration prior and during the US presidential election campaign.
While markets may ultimately gloss over anything but concrete, corroborated and timely evidence
against President Trump, the risk is of heightened GBP/USD volatility.
Figure 16: A very busy domestic (and European and US) political and economic calendar
Source: Electoral Commission, UK Government, House of Commons, European Council, ECB, Federal Reserve
8 June 2017 UK General elections for the 650-seat House of Commons
8 June 2017 EU European Central Bank policy meeting
8 June 2017 US Former FBI Director James Comey to testify to Senate intelligence committee
11 June 2017 France First round of elections for the National Assembly
14 June 2017 US Federal Reserve policy meeting
18 June 2017 France Second round of elections for the National Assembly
19 June 2017 UK-EU Brexit negotiations to officially start
24 Sep 2017 EU German Federal elections
29 March 2019 UK-EU UK membership of the EU formerly ceases
May 2020 UK Original date for general elections (now brought forward to 8 June 2017)
May 2022 UK Next general elections (assuming government does not call early elections again)

20. 20
Past Research on British Elections, Economy and Brexit
UK Election Special – When Two Tribes Go To War, 2 June 2017
US, UK and global GDP growth update – Put the champagne on ice, 28 April 2017
UK Referendum: Blame the weather, not Brussels, 23 June 2016
The A-team had a plan, the British government has a nebulous goal, 13 December 2015
UK general elections: A riddle, wrapped in a mystery, inside an enigma, 13 March 2015