UK Election: What's Going To Happen To Sterling?
Sterling has rallied on expectations of a Boris Johnson win. The basic logic of this is that this outcome will untangle the Brexit logjam quickest - as opposed to a Labour win / hung parliament. We see this untangling as only temporary. That is because the so-called "deal" that the UK has been fixated on for the past three-and-a-half years, is not a trade deal - merely a Withdrawal Agreement (i.e agreeing the terms of exit) as opposed to a Trade Agreement (agreeing the terms of a future trading relationship) which is much more complex.
Now, in the past days and weeks, many analysts and pundits have spoken about an outright majority for the Conservatives being the best outcome for Sterling recovery. In our view, things are not as clear cut as that and can only be viewed in their correct context when time-frames are properly taken into account.
In the immediate aftermath of the election, an outright majority for Boris Johnson, is likely to boost the Pound. Some analysts have predicted rises of as much as 3%. If such a spike happened, it would be limited because the exchange rate has already risen 9.5% since the 9th of August - at the height of the Conservative leadership battle; when a no-deal Brexit was being touted as a serious possibility.
If the Conservatives fail to win a majority and Labour performs better than opinion polls are suggesting, in our view, Sterling could dip in the short-term. Any such drop is, however, likely to be short-lived and by the end of the summer, Sterling is likely to be much stronger than it is now.
However, we do not think that any Labour-induced drop will be below Sterling's August lows. That is because, in our view, the coalition of parties likely to govern in that scenario (a Labour majority is very unlikely) are, ideologically, better positioned to deliver at least one, all or a combination of the following outcomes:
Frictionless trade post-Brexit - assuming Brexit goes ahead.
Faster economic growth - based on their manifesto commitments to increase public spending on infrasructure and therefore raising aggregate demand. Others would argue that this could be inflationary but any such inflationary pressures would, in our view, be limited because the funding will come from general taxation.
Furthermore, a Conservative majority, in our view only postpones the risk of a no-deal Brexit. This view is based on Boris Johnson's promise not to extend the transition period below the end of 2020.
A Labour-led hung parliament, will resurrect the prospect of cancelling Brexit altogether. this is because Jeremy Corbyn has repeatedly stated that there will be another referendum to give the electorate a say in the final outcome. He has stated that in this scenario, a "Remain" option will be on the ballot box. Giving the electorate a chance to choose to Remain is also the position favoured by the SNP, Liberal Democrats and Plaid Cymru who would make likely coalition partners, should the Labour-led hung Parliament scenario prevail.
It is important to note that at least 95% of the USD 5 trillion a day forex market is made up of speculative trades and it is through this lens that the following conclusion is drawn.
In conclusion therefore: Based on the promises made by the party leaders), any boost to the Pound on a Conservative win is likely to be short-lived; and based on the promises made we cannot see sustained Sterling strength beyond the end of 2020 - when the Transition Period ends. In fact, the UK economy could be in, or likely to go into, recession at that point
A stronger Sterling is a more likely longer term outcome if Labour wins. However, short term drops in the rate as soon as the election result is likely / known are possible and further dips later in the year could also happen when a possible Referendum is called. This is because currency markets are driven by speculative trading - not necessarily fact or textbook-certainty.
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None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.