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Election shock? Why you now need to sit up and take note of UK politics

  • YouGov poll forecasts Britain's right-wing Conservative party could be poised to fall short of a parliamentary majority on June 8.
  • Sterling remains 'heavily tilted towards the downside' as investors continue to expect victory for U.K. Prime Minister Theresa May.

A hastily-arranged General Election in the U.K. - that was seen as a foregone conclusion - has suddenly sprung into life with polls tightening and some market analysts speaking about outcomes that would have been inconceivable just weeks ago.

Britain's left-wing Labour party have steadily bridged a seemingly unassailable gap on the ruling right-wing Conservatives in the run-up to the election on June 8, with the latest opinion polls forcing investors to entertain the possibility of a third political shock in as many years.

With investors resolutely aware of the predictably unpredictable nature of U.K. politics, CNBC takes a look at how the race for Downing Street has evolved and whether there really could be a shock in store.

Polls continue to narrow

"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," Paul Meggysei, strategist at JPMorgan, said in a note on Friday.

Until two weeks ago, U.K. Prime Minister Theresa May had appeared on track to secure a landslide parliamentary majority for the governing Conservative party. She had called the early vote, despite repeatedly saying she would not do so, in an attempt to secure a strong mandate during Brexit negotiations and presumably to increase the 17-seat lead that she currently has in the House of Commons.

Prime Minister Theresa May attends the London Conference on Somalia at Lancaster House on May 11, 2017 in London, England.
Jack Hill - WPA Pool | Getty Images
Prime Minister Theresa May attends the London Conference on Somalia at Lancaster House on May 11, 2017 in London, England.

However, on Wednesday, the latest average forecast from YouGov projected May's Conservatives could actually lose seats. While the recent opinion polls show the prime minister's party maintains a slender lead, the Conservatives' diminishing advantage is likely to spur on their political rivals with just eight days to go until the election. The YouGov projections show that she could even have 16 seats less than she needs for a majority, thus meaning that a coalition government would be needed to rule. This would decrease May's ability to push through any reforms and regulations.

There's even a very unlikely outcome whereby the opposition Labour party could team up with the Scottish Nationalist Party in the result of a hung parliament – where no-one has a clear majority - and challenge the Conservatives for power.

"When approaching the final few weeks of election campaigns momentum matters and it is currently with Labour," analysts at Nomura said in a note last week.

"A surprise surge in the 'underdog' happened in 1997 and 2001 in the final two weeks of the campaigns. While that was to the detriment of the Labour party and not enough to provide an upset, it acts as a reminder that polls can continue to narrow even in such a short space of time," Nomura analysts added.

Why is this happening? 

Martin Boon, the director of polling firm ICM, said Tuesday that he expected nerves to be jangling in the Conservative party headquarters.

"The dramatic shifts in polling numbers have been argued in many places to be a function of a sudden surge in young voters and/or 2015 non-voters, motivated by Jeremy Corbyn's populist platform including the abolition of student tuition fees and return to state funded grants," Boon said.

In a separate YouGov poll published Tuesday, the Labour party was projected to be 57 points ahead of the Conservatives among people aged under 25-years-old. While younger voters are traditionally viewed as being less reliable to turn out on election day, only 12 percent of 18-24-year-olds said they would vote Conservative on June 8 with 69 percent indicating Labour would receive their vote.

Sterling 'heavily tilted towards the downside'

Sterling slipped on Wednesday morning after the fresh polling data suggested a hung parliament. However, just a few hours later a separate poll published by research firm Panelbase showed the Conservative party held a 15 percentage point lead. As a result, the pound trimmed some of its losses to trade 0.1 percent lower against the dollar for the session.

"The near-term risks to sterling remain heavily tilted to the downside," Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, said in a research note on Tuesday.

"Sterling is about 2 percent higher than when the election was called suggesting markets remain positioned for a big Tory (Conservative party) win that - in theory - would strengthen May's hands in Brexit talks," Tombs added.

JPMorgan analysts suggested in a research note published Friday that sterling would most likely rise in the immediate aftermath of a Corbyn victory, whereas Nomura researchers argued it was more likely investors would sell the U.K. currency, leading to an immediate fall.

Yet strategists from both banks predicted a softer Brexit stance from Labour would ultimately be positive for sterling beyond the near term.

Labour's Corbyn has vowed to pursue a so-called softer approach towards Brexit, when compared to the Conservative party, as he has pledged to secure the benefits of the EU's single market – a tariff-free trading bloc for goods and services - and promised a more open immigration policy.

"The last two weeks have been traumatic for the Conservative campaign ... Attention has veered off Brexit after deeply unpopular education and social care plans were announced in the Conservative manifesto, while the Labour Party's own policy proposals appear to have been effective at attracting (center-left) Liberal Democrat voters," Deutsche Bank analysts, led by chief economist Mark Wall, said in a research note on Tuesday.

Pollsters 'off my Christmas card' list

While the polls show an increasing uptick in support for Corbyn's Labour party, historically these same polling forecasts have typically overstated the popularity of the left-wing party.

Two years ago, then Labour leader Ed Miliband suffered a disastrous result in the General Election as, despite predictions of a hung parliament. Conservative leader David Cameron pulled off an unexpected victory to become prime minister. He defied bookmaker odds of around 90 percent for a hung parliament.

In response to the latest opinion polls, Miliband said on Twitter, "The pollsters have been off my Christmas card since 2015 #justsaying."

For those who have completely lost faith in opinion polling given the numerous political surprises in recent years, the betting markets could prove a more reliable source of analysis as political gamblers weigh the probabilities of each potential outcome.

"Before getting carried away, it should be noted that the betting markets still have the Conservatives as overwhelming favorites to secure a majority, even though the odds on this have fallen by 5% to 86%," JP Morgan's Meggysei added.

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