This is how sterling might trade on the UK’s pivotal election night

With British voters heading to the polls on Thursday for the third time in four years, markets have mostly priced in a majority for Prime Minister Boris Johnson’s Conservative Party. YouGov’s final poll projected a 28-seat majority, considerably tighter than previous estimates, and indicated that neither a hung parliament nor a more comprehensive Conservative majority can be ruled out.

Sterling slid on Wednesday morning as some caution returned to a currency market which had largely priced in a clear Conservative victory. Speculative sterling shorts, in which investors bet on the pound depreciating, have reduced considerably since mid-September. While a Conservative majority is seen as the most sterling-positive result, the impact of various potential outcomes would likely be asymmetrical, with less pronounced gains on the market-friendly outcome and more meaningful losses should Labour surprise.

A hung parliament would send EUR/GBP towards £0.87 and GBP/USD down towards $1.26 over the next few days as sterling speculative shorts are rebuilt. “On a short-term basis, sterling is trading more than 2% expensive versus the euro because market is already partly pricing in that market friendly outcome. If it is a Conservative victory, indeed there will be gains, but they will be less pronounced than the losses in the case of a hung parliament,” he told CNBC. The unlikely outcome of a fragile Labour-led minority government would cause the biggest downside shock to GBP. If the exit poll shows a surprising amount of red, sterling could be driven down to $1.24 and the euro up to £0.89.