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Uncertainty Looms over Sterling as UK Election Nears

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The British Pound has been on a rocky and volatile path ever since the Brexit referendum sent shockwaves across the markets last June. Conservative Prime Minister, Theresa May, has had the daunting task of containing the situation while trying to keep public sentiment on her side.  Recent Terror events in London and Manchester have not helped May in the polls, the sentiment is that she should have done more when she was serving as the Home Secretary. Policing, intelligence and counterterrorism fell under May’s oversight, and there are concerns over her performance while she held the portfolio.

Her surprise announcement of a general election in April, in order to secure more seats to push through Brexit agendas, appeared to be a good move as she had a significant lead in the polls. The terror attacks, however, have stirred up some negative sentiment and she may now be on the back foot. British people will take to the polling booths on June 8 to determine the country’s fate and ultimately the direction of Sterling.

Labour’s Jeremy Corbyn is closing the gap and the chances of a hung parliament, or even a Labour majority, seem entirely possible. A recent YouGov poll, from 31 May, predicted that Conservatives could expect to fall 16 seats short of a total majority. Meanwhile, the GBP has failed to break above the 1.30 USD mark ever since the Brexit referendum, and all the recent uncertainty has made the currency continue to falter, even after a brief surge following May’s announcement of  the election in April.

The combination of shaky confidence in May, an inspired Corbyn, and a general distrust of polls after what happened with Brexit and Donald Trump in the US, is proving lethal for Sterling, as investors are less and less attracted to the currency. Jameel Ahmad, FXTM’s VP of Market Research and Corporate Development, affirms as much: “The public’s general suspicion of polling data has created a thick cloud of uncertainty whenever it comes to any election, and this is absolutely being echoed in the financial markets in the case of the UK General Elections and the Pound.”

While sentiment leaned towards the Conservatives and the prospect of May grabbing a 100-seat majority looked likely, the Pound strengthened significantly. However ever since Labour started to gain traction, blunting the Conservative edge, the Pound has slipped against both the USD and the EUR. “In the first quarter of the year, the UK economy failed to grow as expected. On the other side of the spectrum, EU economies have been improving. That recipe is usually very desirable for the markets, but with this general election looming in the immediate future, the effect is a double-edge sword. Meaning, the stronger the Euro grows, the likelier that Sterling will feel more pressure,” continued Ahmad.

While we won’t know for certain what the outcome of the election will mean for the Pound, we can expect uncertainty around the currency to linger for some time. In the scenario of a Labour majority parliament, the consequences for Sterling are anyone’s guess. Historically, hung parliaments and a strong Sterling don’t make great bedfellows, although it’s important to note that a hung parliament will pave the way toward a softer Brexit approach, which could ultimately be a good thing for both the Pound and the Euro.

If early polls end up proving true, and May manages to bag a Conservative majority win, the predictions over what will happen to the Pound get a little firmer as the currency is expected to bounce back in strength. However, in this environment, anything can happen.

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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