On May 7th the people of the UK will go to the polls to vote on what is being called the closest election in a generation. Politicians will have been campaigning for months in an effort to win votes yet it seems that when all the votes are counted we are unlikely to be much closer to knowing who will be in power.

Currently all opinion polls are pointing towards another hung parliament meaning no one party will be able to win a majority. The question is what impact will this have on Sterling exchange rates?

 

What Impact Could a Hung Parliament Have On Sterling?

Looking back 5 years ago we can see quite clearly the effect the election had on Sterling. The graph below shows the movement we saw on Sterling Euro exchange rates in the run up to, during and after the election. It is clear it was a volatile period and it is likely to be even more volatile this time around and that is all down to uncertainty. It was in the weeks leading up to the election where we saw Sterling suffer as the uncertainty took its toll however, when the coalition was formed and we started to get a clearer understanding of who would be running the country GBP exchange rates started to strengthen. The graph below shows a period of approximately 3 months and during that period we saw Sterling move by almost 10 cents which on a currency transfer of £200,000 meant the difference of roughly €18,000.

One thing financial markets do not like is uncertainty, while we are stuck in limbo waiting to see what comes of the inter-party wranglings we will not know who will be leading the country and what economic policies we will be following for the next 5 years.

It is this huge uncertainty that weighs on the Pound now and is likely to weigh on Sterling in the coming weeks and if no clear winner is announced it will weigh on Sterling for months to come.

 

Why Could This Hung Parliament be Different to 2010?

In the last 85 years there have only ever been two hung parliaments, one in 1974 and the other in 2010. It could be argued that 5 years ago many of the politicians were not as prepared or as well versed in the ‘politics’ of a hung parliament and the tactics needed to form a coalition. This time around all the parties are entering into this election with their eyes wide open expecting to have to form cross party alliances. In much of the rhetoric we are hearing it seems they are already sizing one another up as to who could be their next potential coalition partner.

Also different to 5 years ago, we are witnessing a much larger split of the vote across more parties. The increase in popularity of the Scottish National Party and the Green Party are good examples of this with some polls even putting these parties ahead of the Liberal Democrats.

There is then of course the rise of Nigel Farage and UKIP who seemingly are now the third most popular party in the UK and could hold the key as to who gets into power. All this means that there are plenty more suitors for the Tories and Labour parties to bond with should it be a hung parliament.

It is because of these reasons we expect Sterling to suffer even more than it did in 2010 and the relatively smooth transition we saw with the Tory-Lib Dem coalition be less likely. The question is who will form an alliance and what impact could this have on Sterling?

 

Possible Outcomes of The Election

If the polls are right and the election results are as tight as predicted trying to predict an outcome is near impossible. Depending on the negotiations we could have another coalition between two parties or potentially even between several parties. We even heard recently from a Labour MP that they should not rule out a ‘Grand Coalition’ where the Tories and Labour parties work together. Finally, it is not unthinkable that should no one party gain a majority and talks over forming a coalition break down we may be forced to revert to another election.

Then when we look more closely at some of the election manifestos we see there is great disparity between the parties and it could be argued that despite the UK’s better economic position at present it could quite easily be destabilised. Some of the big questions that will inevitably effect the UK and Sterling include should we be spending or saving, staying with or leaving the European Union. Each of the parties have been quite vocal about their views and ideals surrounding these and many other topics and to find two or even more parties that are willing to make the necessary concessions may prove to be a challenge. Again, this all leads to more uncertainty for the UK, the financial markets and for Sterling exchange rates.

 

How Can I Protect Myself from This Uncertainty?

If you need to make a currency transfer in the coming months and are concerned about the potential for this election to cause Sterling to drop and therefore make your currency purchase more expensive there are methods to help you.

Using a forward contract you can secure a rate of exchange at the current levels for a period in the future for just a small deposit. This means that once you fix your exchange rate no matter what happens your rate will not change. This makes it perfect to remove the uncertainty and to allow you to have some peace of mind. In order to take out a forward contract you need to know the amount of currency you want to buy or sell and a rough idea of when you will need the currency. To secure a rate of exchange you can simply do it on the phone with one of our experienced and helpful currency brokers.

It seems clear uncertainty will remain prevalent over the coming weeks and that the currency markets are likely to remain volatile. One thing that we can be sure of though is that here at Foreign Currency Direct plc we will continue to assist all our clients in making informed decisions about when to make their currency transfers at our excellent, award winning exchange rates.

 

So, if you would like to discuss the upcoming election and its impact upon Sterling exchange rates in more detail please either email me at jmw@currencies.co.uk or alternatively call straight through to our trading floor on 0800 328 5884 or if calling from abroad on 0044 1494 725353.

Download our monthly currency forecast

Download here