The upcoming UK general election and how it could affect sterling

Wednesday 4th March 2015

A look at the potential impact of the UK general election

In today’s report we’ll take a look over the horizon at how the 2015 UK general election could affect exchange rates. However, let’s first have a quick look at what the pound has been up to against the euro.

Sterling/Euro

After a volatile week the sterling/euro cross stabilised somewhat yesterday, with the exchange rate remaining range-bound within a 30 pip range in the mid €1.37s.

GBP/EUR

EUR

 

As regular readers will know, it is mainly the ongoing uncertainty with Greece that’s causing the GBP/EUR exchange rate to remain so high. Sooner or later a long-term agreement is likely to be finalised and, when this happens, it could remove much of the negative sentiment towards the eurozone that has been driving the GBP/EUR cross upwards.

It is of course impossible to predict exchange rates, however, with the current rate the best we’ve seen since 2008, it would be prudent to talk to us about any euro requirements you have within the next six months. We can also lock in the current exchange rate for you for up to two years with only a small 10% down-payment, thus protecting you against any adverse market movements.

A €250,000 property purchase is a staggering £15,000 cheaper now than in January due to the current euro weakness, so you don’t want to lose out unnecessarily. With the UK general election only a few months away, the pound could be in for a rocky ride…

How could the UK general election affect exchange rates?

As the currency markets were relatively quiet yesterday, it’s an opportune moment to take a slightly longer term look at how the 2015 general election could affect sterling. Any political uncertainty often generates weakness in a currency, and this election is likely to be one of the most uncertain in a generation.

Whatever happens, it’s going to produce a very unusual result. Consider the following:

  • There have only been two occasions in history – both of which were back in the 1950s – when a government in power for more than a few years has increased its share of the vote.  David Cameron needs exactly this to win.
  • For Ed Miliband to win a majority, after Labour’s defeat in 2010, he’d need to achieve a result that’s only happened three times in the last 100 years – another unlikely scenario.
  • The third option is a coalition; the last time this happened on two consecutive occasions was over 100 years ago.

So, as you can see, any of the three possible outcomes will be almost unprecedented!  This means the pound is likely to come under significant pressure as the election gets closer. As I’ve stated above, elections often weaken a currency anyway due to uncertainty, so there is the possibility this could limit any further gains in sterling exchange rates.

Today’s data

The only UK data of note today is Markit/CIPS Services PMI, which is an indicator of the economic situation in the UK services sector. Elsewhere we have the latest retail sales from the eurozone, while in the United States there are mortgage numbers, employment figures, manufacturing PMI and a speech by a Fed member. Expect a volatile afternoon for cable should the numbers differ from the forecasts.

For more information on the rates and contracts available here at Foremost Currency, please contact me on the details below. Alternatively, you can register for a free trading account here.

Alastair Archbold

Senior Currency Broker

+44 (0)1442 892066

[email protected]