How could a general election affect Sterling?

In today’s post I’ll look at how could a general election affect Sterling. First, a quick look at what’s happened to the Pound since yesterday, as much can change in a day!

Pound/Euro rates fall

In our last post yesterday afternoon, the Pound/Euro rate had surged into the mid €1.12’s. The gains were not to last however, and by the close of play all the gains had been relinquished. In the ECB press conference Mario Draghi played down recession fears, and this lent the single currency some support. We still think they will cut interest rates later this year, but as rates were not cut yesterday, it allowed the Euro to claw back its losses against the Pound, brining the rate back down.

How could a general election affect Sterling?

There is talk that we could see a general election this year. If so, what effect could it have on Sterling? Boris has a very slim majority in the House of Commons. An upcoming byelection next week could reduce this further, as it’s expected that the Conservatives will lose their seat. Due to the renewed popularity of the Tory part, and the swing back to them from the Brexit party, Boris may choose to call an election to try again gain a larger majority. He could be forced to in the event of a vote of no confidence.

There are no guarantees that he would win. An election would mean extending Brexit yet again, and if this happens voters may become disillusioned with the new administration. The uncertainty an election would cause would almost certainly be bad for the Pound. I would expect the GBP/EUR rate to drop below the €1.10 mark if it happens.

You then need to look at the possible result. If he could command a majority, then I think the Pound would rise. It would make it much easier for the Conservatives to push legislation through parliament and help break the current deadlock caused by the slim majority they have now. The political climate in the UK is complex to say the least. Voters who want to remain in the EU can choose between the liberal democrats, or Labour should they commit to a second referendum. This in turn would increase the risk to the 300 year old union, as the SNP would call for a new Scottish referendum.

If Labour won power, in my view the Pound would collapse. Regardless of your political views, the markets would not see this in a favourable light. Corbyn is against free markets, pro re-nationalisation, and their economic proposals would likely to significant harm to the economy. In this scenario, the Pound/Euro rate would likely drop below parity.

Sterling in for a rocky ride

The coming months then, are likely to be significant for what happens to the Pound. Right now it’s stable as markets wait to see what is going to happen. A no deal Brexit is still quite unlikely, but if Boris can’t re-negotiate a better deal with the EU, then Parliament will try to stop no deal. This would lead to the elections scenarios described above, and be catastrophic for Sterling. So if a deal can be done, the Pound will climb. If it cannot, then the various alternative scenarios are all likely to send the Pound lower.

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