With the U.K. general election taking place this week, all eyes are on the polls. In recent weeks, Labour has made noticeable gains to the previously uncontested Tory lead in this election.
When Theresa May called the snap election in April, markets were confident the result would be a significant Tory majority; strengthening May’s position and giving her a mandate as Prime Minister of the United Kingdom.
Despite receiving a boost after Theresa May announced her snap general election, the British pound continues to experience volatility correlated to polling results and sensational international politics. The impromptu election was expected to be a simple win for the Conservatives, but nothing has gone to plan. Since the beginning of May 2017, Labour has gained nearly 10% in recent polls, and some of those gains have been at the Conservatives’ expense.1
What Does a Hung Parliament Mean for the Pound?
Labour’s fringe leader, Jeremy Corbyn, who has spent most of his career opposing other Labour leaders, seems too extreme to capture any middle ground. That’s why Theresa May is considered the safer bet, but her post-Brexit vision remains unclear, which means many are worried that this election may result in a surprise ending just as the Brexit referendum did one year ago. The alternative to the two is a possible hung parliament.
A hung parliament means neither party has a majority in the House of Commons. Last week, YouGov released a poll suggesting a hung parliament would be the most likely outcome of the election, and the pound subsequently dropped to below $1.28. Why? Because the geo-political context matters more than ever right now. With Brexit negotiations looming, investors are seeking clear intentions from Britain.
Is the Pound Going to Drop?
The uncertainty in terms of how Brexit will unfold and therefore, how it may affect the British economy long term, is not an easy call for investors to make. It seems many investors are avoiding the question altogether by investing elsewhere. This could have protracted effects on the value of the pound.
Many believe that a Conservative win in parliament would bring some certainty to Brexit negotiations and may bolster the pound accordingly to $1.31 USD and €1.18 EUR. A Labour win may have an opposite, and profoundly more dramatic, effect.
But investors aren’t looking just internally at the U.K. External factors make a substantive difference in this case, as the U.K may be headed for increasingly antagonistic relationships with both the U.S. and the eurozone. Consider the context:
- Donald Trump seemingly executes policy on his personal whims with little willingness to factor in existing partnerships and agreements.
- France and the Netherlands just elected pro-Europe leaders.
- Germany is headed for a major election within months, the result of which may solidify the alliances in continental Europe leaving the U.K. at a considerable disadvantage during Brexit negotiations.
Is the Pound Stronger than the Euro?
While the pound is stronger than the euro, trading at €1.14 as of this writing, keep in mind that prior to the Brexit vote it was trading at over €1.30. That’s a decline of nearly 13% since June 2016. Should a Labour victory upset the status quo as the Brexi vote did last year, its effect on the pound could be substantive.
How Can You Protect Your Money?
While a clear Tory majority may bolster the pound slightly, most other scenarios, including a hung parliament, Labour win, or modest Tory majority, are likely to see the pound decline over the long term if not immediately. If you’re worried about how high or low it may go, now is the time to lock in an exchange rate with a Forward Contract. Alternatively, you could use a target rate tool called a Limit Order, which transfers your funds automatically when your desired exchange rate is reached. Contact OFX 24/7 for more information.
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. OzForex Limited (trading as OFX) and its affiliated entities 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.
