UK Election – The Future of the Pound
The UK election are becoming the biggest event risk for FX markets in the coming weeks. The British Pound has fallen back as polls have tightened over the last two weeks, as the UK parliamentary elections will catalyze the next big move.
As for now, conservative Prime Minister Theresa May will deploy Boris Johnson to the northeast of England in a bid to conquer Brexit-supporting Labor strongholds. This happens as the fallout from the London terror attacks continues to dominate the campaign.
Johnson, one of the faces of the Leave campaign, will say in a Tuesday speech that only May can “get Brexit right.” Labor will aim to shore up its support in working-class areas with a warning that May’s plans to cut winter heating support for the elderly will cause thousands of extra deaths.
What does this mean for the market
The election is expected to have a significant impact on GBP and the financial markets in general. As we walk into this round of general elections, Cable is sitting very near the middle of that post-Breakout range; and based on the results this Thursday, the pair is set to put in a major move in one direction or the other.
From the point of view of the market, a sizable Conservative majority would be the preferred outcome from this election, and it is also very much the anticipated one. In this event, we would be unlikely to see a significant equity market movement, all other things being equal.
While many investors might have been hoping for a landslide, most polls do show a narrowing between the two main parties with Theresa May remaining Prime Minister. The continuity offered by even a small majority for the Conservatives would probably still come as some relief.
And the Pound?
While a Labor victory is still highly unlikely, it appears that markets have put a pause on the British Pound’s uptrend as the odds of a hung parliament have grown. Still, we expect the Conservatives to walk away with a meaningful majority, which should dispel some of the reasons traders have pulled Sterling away from its yearly highs versus the Australian, New Zealand, and US Dollars.
Some commentators have also suggested that given the volatility in recent polling numbers, including last week’s dip in GBP after a published poll indicated we could be looking at an extremely volatile situation across markets. Equity investors however, are still more concerned, although this partly reflects underlying wariness across global stock markets amid a bout of geopolitical stress.
However unusual and uncertain the current political landscape may seem, investors should try to avoid basing long-term asset allocation decisions on party manifestos, speeches, polls and commentary. The only thing for certain is that the pound is in for a bumpy ride over the next week.