Uncertainty Continues to Hover Over Sterling as UK Election Approaches

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The UK General Election is dominating the financial headlines as voters prepare to cast their votes in the June 8 General Election. It was believed that election should create stability by giving May the seats needed in Westminster to roll out her Brexit strategy with relative ease. But that was then –the winds of change have swirled up against her and are now behind the back of Jeremy Corbyn-something no one anticipated. The Sterling is now reflecting the political turmoil.

On face value the surprise election in early April looked like a master stroke, May was over 20 points ahead in the polls, and Labour’s Jeremy Corbyn, was his party’s most unpopular leader in years – so winning the election looked like a certainty.

However recent polls are now showing that Corbyn is edging closer, making May’s bid for extra seats a little more elusive. Those who were once convinced that May would easily bag a Conservative majority, are now less confident in their predictions. One recent poll, from YouGov, even suggested that a hung parliament is the most likely scenario with Conservatives missing total majority by 16 seats.

What does all this mean for Sterling? The currency has been treading flaky waters ever since the Brexit referendum, with investors jumping ship and anchoring themselves to safer bets like the EUR or the Japanese Yen. When May made the election announcement, the GBP experienced a sudden high that jolted it out of its lows, which were struggling to reach over the 1.30 USD mark. But in the weeks leading up to 8 June, as more uncertainty started to brew, the currency’s value began to drop again.

FXTM’s VP of Market Research and Corporate Development, Jameel Ahmad, gives more insight: “Ever since Donald Trump and Brexit last year, the public has lost a lot of confidence in polls” Ahmad explains. “So, the fact that May has been leading in the polls won’t really reflect strongly on the currency, as it might have done a few years ago. Due to this mistrust, and the added element of surprise that has dominated recent political events, uncertainty is very much at the forefront and this is directly echoed on the forex market.

“Added to this, the health of the UK economy in the first quarter of 2017 was frailer than people predicted and Europe’s economic growth has been impressive at the same time. Usually, this would be enough to make a sizeable impact on the currency markets, but with the general election looming on the horizon it becomes a two-fold issue: the stronger the Euro becomes, the more pressure Sterling will feel.”

The strength of the Pound seems to correlate with the way the Conservatives are faring. When Labour started to move up in the polls, and the likelihood of a hung parliament became more and more probable, Sterling weakened against both the Euro and the Dollar. If May does manage to claim a majority win, the nation’s currency could be buoyed and investors will feel surer about it. May’s attitude on Brexit has been clear since she took the reins from Cameron, and the sort of stability that will come with a win could also be reflected in the markets.

Beyond this, predicting the fate of the Pound is a fool’s errand. In the event that a Labour majority parliament is formed after 8 June, or a centre-left coalition emerges, the only certainty regarding the Pound is that its future will be very uncertain for quite some time. Historically, Sterling usually bears the brunt of the lack of clarity that hung parliaments reflects. The positives of a Labour win or a hung parliament is that both would most likely mean a softer strategy for Brexit, which would be a good thing for the trading bloc. Perhaps even good enough to bolster both the Euro and the Pound.

In just a few days, the world will know the results of the UK General Election and the future of the Pound will be that much clearer. Given recent events, however, we should expect scepticism and suspicion to continue driving investor sentiment and no pundit dares to predict the outcome of the election with total confidence. June 8th will be a defining moment for the currency regardless of the outcome of the election.

UK Election 

Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

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