The Impact of the UK Election on Sterling Exchange Rates
As the dust starts to settle on the UK election and David Cameron begins his five year tenure as Prime Minister of a Tory majority party the impact on Sterling is a big focus for all those in the currency markets. Prior to the election we had predicted that a majority government, particularly a Tory majority, would be taken well by the markets and in fact it has led to Sterling strength against most the major currencies. The fact the markets now have some certainty and an understanding about the economic policies moving forward helps the Pound and as a result we are now a couple of cents better than the low we saw in the lead up to the election last week.
Thanks to what turned out to be rather incorrect polls, most analysts were predicting a hung parliament and extended negotiations between some of the major parties in order to form a coalition government, however the polls couldn't have been more wrong! As it turned out the Tories gained more than enough seats to create a government to many people's surprise. As a result of this, prior to the election Sterling started to drop significantly, falling by over 4 cents from the end of April in anticipation that we would be stuck in political limbo as parties began their protracted negotiations. However, almost as soon as the results started filtering through the Pound rallied.
Exchange Rate Movement Before, During and After the Election
The movement before and during the election was significant and presented some good opportunities for both clients looking to buy or sell foreign currency, however many clients are now interested in what the future holds. There are two big unknowns hanging over the UK now, firstly David Cameron and the Conservatives have promised an in-out referendum about the European Union and secondly with the Scottish National Party taking so many of the seats in Scotland there is uncertainty as to whether there will be another Scottish referendum. We saw last year the impact of a Scottish referendum on Sterling exchange rates and should the SNP force another vote we could be in for interesting times as there is clearly a lot of nationalism in Scotland as the success of the SNP proves. With regards to Europe, the fact that UKIP won so many votes (although only 1 seat) during this election, highlights there is a lot of Euro sceptics in the UK and a referendum could put our inclusion in Europe at risk. Considering the Eurozone is our largest trading partner, should we decide to leave it could put up barriers for many of our businesses that do so much business in Europe and this could be catastrophic for the Pound.
So, despite a positive, decisive and largely unexpected conclusion to the election there are still some large questions hanging over the country. Political stability is key for a country's currency and while I think we will see Sterling hold relatively steady in the short term the focus is likely to return back to Greece and the "will they wont they" default on their debts which is likely to dictate the movement in the short to medium term for most the major currencies. Greece are due to make a payment of €763 million on the 12th May and it will be interesting to see whether they are able to make this payment, the rhetoric recently from the powers that be in Greece are that they will not make any concessions and with even larger payments than the one on the 12th due over the coming weeks the Greek saga is going to run and run.
If you are considering your currency requirements and want to gain a better understanding of the impact of the recent election the following is a highly useful article: www.switchmybusiness.com/articles/election-values-sterling-exchange-rates-explained or alternatively get in touch today by calling straight through to our trading floor on 0800 328 5884 or if calling from abroad on 0044 1494 725353 alternatively you can email me directly on email@example.com