International CurrencyInternational Currency

How could the general election impact the pound?

Political campaigning to win the UK’s general election is in full swing, but with so much at stake in relation to Brexit, it’s hard to know if this election will follow the more traditional rules.

The front runners are still the Conservatives and Labour, but with relatively controversial leaders in both Boris Johnson and Jeremy Corbyn respectively, there could be some shocks in the offing. The Liberal Democrats have taken a strong ‘Stop Brexit’ stance, a message shared by the Scottish National Party (SNP), potentially turning this into a referendum of sorts. As a polar opposite, you have the Brexit Party, led by Nigel Farage. Who will win is very difficult to call.

All this uncertainty weighs heavily on the pound which has shouldered the burden of Brexit uncertainty for more than three years now. But remember, volatility in currency is not always a bad thing –you just need to know how to take advantage of market swings with the right combination of products.

So, for individuals and businesses who need to move money to or from the UK in the coming months, OFX has scoped out some of the things to look out for and the impact of various election outcomes to give you a better idea of what could happen and how you can plan ahead with confidence to protect more of your money.

1. What if the Conservatives win the general election outright?

We believe a Conservative win should see the pound boosted to between US$1.33-1.35, €1.18 –1.20, AU$1.90 –1.93. This is likely to strengthen the pound considerably as the uncertainty about Brexit happening would disappear, providing Boris Johnson gets enough of a majority to see his Brexit deal through Parliament. More clarity for the UK politically and economically has a positive impact on the value of the pound.

But another potential difficulty for the pound is Johnson’s insistence that he can do a trade deal with the EU before the transition period is due to end on December 31, 2020. It took Canada seven years to finalise a trade deal with the EU, so this looks like wishful thinking, and any delays could again hit the value of the pound. So, watch this, as any boost to the pound could be short-lived, creating further opportunities for those needing to move money into the UK.

2. What if Labour wins outright?

This brings more uncertainty to Brexit because it reopens the possibility of the UK not leaving the EU at all, so we see a Labour win as putting the pound at US$1.26-1.28, €1.12 –1.15, AU$1.85 –1.87. Jeremy Corbyn has said Labour would look to offer any deal negotiated with the EU to a second referendum, which would also have the option to stay in the EU. This is not so good for the pound as there would still be no clear way forwards.

If you can't risk busting your budget and need to move money to or from the UK, you might want to consider fixing the rate with OFX and trading pre-election with a forward contract. In volatile markets, rates can move at pace and you can see big moves that could work against you.

Let's cast our eye back, if you needed to transfer GBP into USD$100K, and you traded on August 10, based on market rates, you would have received US$1.2037 – a 34-year low for the pound against the US dollar. This would have cost you £83,077.17. But by November 18, based on market rates, you could have achieved US$1.2963 meaning the same transaction would have cost you £77,142.64 - saving you £5,934.53. An OFX forward contract allows you to lock in a great rate for up to 12 months. Get started with an OFX account.

Alternatively, if the pound rallies on election night and that works in your favour, consider an OFX forward contract to lock in this rate for the next 12 months.

London

3. What if there is no outright winner?

In this case, there are a number of things that could happen:

  • An opposition coalition – this would most likely be between Labour and either the Liberal Democrats or the SNP. In this case, we also estimate the pound could hit somewhere between US $1.25-1.28, €1.10 – 1.13, and AU$1.85 –1.87.
  • Potentially the SNP is the more likely partner, as Liberal Democrat leader Jo Swinson has “absolutely categorically” ruled out working with Labour because she has described Jeremy Corbyn as “not fit for the job of Prime Minister”.
  • Whether this Lib Dem stance would remain after election night if there was a chance of getting into coalition with Labour remains to be seen. The one thing an opposition coalition brings is the potential for Brexit to be stopped altogether through a second referendum, which is something that businesses particularly would be happy with, even though in the short-term it would continue the uncertainty. So, we anticipate a boost to the pound from an opposition coalition depending on how the coalition is formed and who by.
  • A Conservative coalition – this would still set the scene for Boris Johnson’s Brexit deal being cleared through Parliament. So, we would still estimate the pound would be worth US$1.26-1.28, €1.12-1.13, AU$1.83 –1.85, as it is unlikely the Conservatives would choose a coalition with a party that wants to prevent the current deal going through. That said, there is still the potential for disagreements and more uncertainty, hence the slightly lower bottom end of this spread versus a Conservative majority.

4. I have to make my transfer before the election date, how can I protect my payment?

If, perhaps, you are a business buying equipment or raw materials, you can give yourself the best chance of benefiting from the ups and downs ahead of the election by using a Limit Order. This allows you to target a set rate that you will automatically trade at, which can help you capitalise on any volatility that happens overnight after the December 12 results. OFX watches the market for you 24/7 so you don’t have to. Register today and one of our currency experts will give you a call.

For example, if you had moved money from Australian dollars to the UK on June 8 you would have got £0.5494 based on market rates and moving AU$100,000 you would have received £54,940. Yet on August 10 when the pound had weakened to £0.5639 to the AUD and you’d booked a Limit Order targeting that rate, you would have received £56,390-an extra £1,450 by targeting the better rate.

Working with a currency specialist to help you navigate the complexity of an uncertain market can help to control your exposure and maximise potential upsides. Hear from OFX currency experts on their take on the election and potential impacts for the pound.

To find out how to make the best decisions no matter what happens in the election, you can get in touch with OFX experts worldwide in one of our regions contact numbers below or by email at customer.service@ofx.com.

United Kingdom Personal: +44 207 614 4194, Business: +44 207 614 4195
Hong Kong Personal: (+852) 3008 5721, Business: (+852) 2777 7147
United States Personal: 1-888-288-7354, Business:1-888-966-6888
Canada Personal: 1-800-680-0750, Business: 1-855-680-0745
New Zealand Personal: 0800 161 868, Business: 0800 161 898
Ireland Personal /Business: 1-800-948-364
Germany Personal /Business: 0800-181-7242
Spain Personal /Business: 900-838628
France Personal /Business: 0805-080584 

 

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IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.

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