Sterling Faces Uncertain Times as the Election Looms

07 June 2017 9:49:01 AM

In a stroke of political genius that silenced vocal opponents and solidified her authority, British Prime Minister Theresa May, called a general election two years early. Rather than attempt to negotiate Brexit with a scant majority of parliamentary seats, and be forced to accommodate a Scottish Nationalist Party (SNP), she decided to make a bid for extra seats.  

At the time, the markets responded well. Polls predicted a 100-seat majority for the Conservatives. Labour’s lacklustre leader, Jeremy Corbyn, seemed unlikely to present any serious competition, and Scottish voters were disenchanted enough by the SNP’s insistence on yet another Independence vote, to put an end to Nicola Sturgeon’s strangle hold on Westminster. It looked like plain sailing for May, and Sterling rallied to six month highs as she announced June’s general election.

A YouGov poll published at the end of May, took the fizz out of the campaign. Labour had been gaining ground thanks to Corbyn’s strong performance in leadership debates and his core of loyal members. YouGov were the first to suggest that May would not only fail to hold on to the 330 parliamentary seats she currently holds, but that she would fall 16 seats short of a parliamentary majority. No majority means a hung parliament.

Traditionally, this would be bad news for Sterling, but seen through the prism of Brexit, it takes on a new light. May has made her stance very clear, but Labour would likely deliver a much softer Brexit than the Conservatives. As either a leader of the majority or the dominant member of a coalition government, Labour would be good news for the EU, and the trading bloc’s currency could rally as a result. That said, left-leaning parties, with their habit of taxing more and spending more, are typically very good for the markets. How Sterling would perform if the Conservatives fail to win the election, is still up for debate.

In light of the fact that a probable Conservative win gave the Pound a boost in April, it would seem logical that confidence in Sterling would be improved should May prevail. A clear majority would increase her authority going into Brexit negotiations, and the markets would likely be happier if small, vocal groups like the SNP were excluded from the decision-making process. 

Regardless of the outcome, it seems clear that political uncertainty will likely drive the value of Sterling for the foreseeable future. The currency has struggled to break the USD1.30 point since July 2016’s Brexit vote and following the shock of that vote and Trumps election, investor confidence in polling data is at an all-time low.

Economic growth in the UK for the first quarter was also weaker than expected, which could play a role in preventing the Pound from rallying, particularly since EU counterparts have seen no such decline. Traditionally, that may have been enough to influence the currency, but with the Brexit shadow looming, the effect is two-fold. Any strengthening in the Euro could put even more pressure on the Pound over the next couple of weeks. 

How the vote will go on Thursday is a difficult one to call, and contradictory polling data means it will be Friday morning before we truly know what punches will be thrown and how Sterling will take them.   

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