Fed Near Neutral Signals Caution Ahead, Shifting Focus to Fixed Income in 2026 
The markets were taken by surprise in mid-April when Theresa May called a snap general election, but aside from an initial flurry of excitement, FX investors had shown little interest in what the opinion polls indicated was a one-horse race. The initial opinion polls had the Conservatives leading Labour by over 20pts and so on course to multiply their parliamentary majority of 10 seats by a factor of more than 10.
But the last two votes in the UK both delivered 10 delta political shocks – an outright Conservative majority in 2015, when the bookies had 90% odds on a hung parliament, and the vote to leave the EU last year which defied similarly overwhelming odds – and investors are now starting to consider whether history might be about to repeat itself following an almost continuous decline in the government’s opinion poll standing since the election was called.
The wake-up call for markets was a YouGov poll released overnight – this shows a halving in the Conservative lead to only 5pts compared to an average of polls at the start of the week (the YouGov poll was conducted after the terrorist attack in Manchester).
The average margin of error in UK opinion polls as a whole is approximately 5pts, and so the YouGov poll could be considered an outlier consistent with a true reading that is still closer to 10pts.
On the other hand, it is also consistent with the Tory lead having all but evaporated following the widespread criticism of the proposed changes to social care charges in its election manifesto. The deterioration in the polls is even more concerning for the Conservatives since they need to ensure a lead of around6pts in the popular vote to secure an outright parliamentary majority.
One G10 currency that is in play but which we are not yet positioning for is GBP. The outlook section describes the election scenarios in more detail; suffice it to say, however, that we would be more comfortable selling GBP versus EUR on any relief rally should the Conservatives buck the trend in the opinion polls and secure a modestly enhanced majority at next Thursday’s general election as still seems probable.
