How could the General Election affect Exchange Rates?

With just over a week to go until the UK General Election, in today’s report we’ll take a look at the possible outcomes and their potential effect on Sterling exchange rates.

Where things stand now 

A month ago Theresa May called the snap election, and indications were that she would win a landslide and this helped push the Pound to €1.20 vs the Euro and $1.30 vs the US Dollar. Since then however, her 14 point lead has been reduced to just 5, and this has weakened Sterling, pulling GBP/EUR back to €1.15. Due to the polls, there are now a range of outcomes that we could see next week, and we could see huge swings in exchange rates. Let’s have a look at each scenario along with my view on what effect it would have for the Pound.

Landslide victory for the Conservatives 

This is what markets thought would happen a month ago, and should the polls swing back in May’s favour and a landslide victory, it should push the Pound much higher. Why? A much bigger majority means she would not have to pander to the ‘Hard Brexit’ Eurosceptics in the conservative party and be able to make compromises with the EU leading to a more orderly Brexit process. It also pushes back the next election to 2022 giving more time to get a decent deal implemented. It would also give her the mandate required to negotiate properly on behalf of the UK.

Conservatives win but without extending majority 

This should help the Pound but not by much. We would simply be back to where we were a month ago before the snap election was called. It would still mean longer before the next election which should help the Pound, but without a larger majority, it’s likely her ‘hard line’ approach to the EU would continue, raising uncertainty and keeping the Pound in check.

Hung Parliament 

This would be a big worry for the markets and would likely send the Pound much lower in the short term. Back when the Lib Dems went into coalition with the Tory’s the Pound fell. This time it’s even more important as during the Brexit negotiations parties like the SNP, Lib Dems would have more influence, and party politics would make a mess of the Brexit talks and raise market uncertainty. However it could mean that ultimately a softer Brexit would prevail which could help the Pound, but not for some time.

Corbyn becomes Prime Minister 

A month ago this was not even a remote possibility, however if the latest polls are to be believed, then this is now a distinct possibility. Regardless of your personal political views, this result would almost certainly send the Pound crashing. The entire fiscal outlook for the UK would have to be re-evaluated: more borrowing, higher taxes and a rising deficit would all be Sterling negative. Longer term, as with a hung parliament, this scenario could end up in a softer Brexit which in the long term could help the Pound, but their fiscal policies may far outweigh this. Especially if Diane Abbot is doing the maths.

Huge Volatility Expected 

The coming 8 days are likely to be extremely volatile for anyone with a currency requirement. To get a strategy in place to decide what action to take and when to fix a rate, contact us today. 

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