Political events have a big impact on the pound, from Sterling's dramatic decline in the wake of the Brexit referendum to the uncertainty during the partygate scandal and the volatility following Liz Truss's 2021 mini-budget.
The political landscape has stabilised since Rishi Sunak took the reins as Prime Minister but another general election is looming, with the potential to infuse the pound with fresh volatility. So, how could the upcoming election impact GBP exchange rates?
When will the UK election happen?
The UK general election will take place on 4 July 2024, after Rishi Sunak surprised the country by calling a snap election.
The decision came off the back of an upgrade to the UK's growth forecasts from the International Monetary Fund (IMF) and a rapid cooldown in UK inflation, with the headline rate easing from 3.2% to 2.3% – close to the Bank of England's (BoE) 2% target.
Which party is likely to win?
At the time of writing, Labour remains far ahead of the Conservative Party in the polls. The latest MRP poll in early April by YouGov saw Labour winning a 154-seat majority, with the opposition party securing 403 seats versus 155 seats for the Tories.
More recent polls put Labour ahead with a 21-point lead on average – enough to secure a majority.
We're likely to see Labour's lead taper somewhat, as the polls tend to narrow as election day approaches. However, the Tories could have a tough time closing the gap – even if Labour runs a lacklustre campaign.
Most political commentators believe a Labour victory is all but a foregone conclusion, with a majority win the most likely outcome.
How could the election impact the pound?
Generally speaking, political uncertainty is bad for the pound. Therefore, we could see volatility and weakness in GBP ahead of and during the election, particularly if the gap between the two main parties narrows.
That said, markets seem ready for an election. And with the expected outcome of a Labour victory looking highly likely, the volatility may prove minimal.
Labour victory
If the Labour Party does win the election and form a majority government, Sterling could strengthen. While markets usually prefer continuity over change, it seems that Labour's shift to a more pro-business, centre-ground position has wooed investors.
A Bloomberg poll found that 44% of professional investors think a clear Labour victory would be the 'most market-friendly outcome' of the election.
In comparison, just 25% of finance professionals saw an outright win for the Conservative Party – which has typically been the party of business and finance – as the best result.
Coalition government
It's likely that the most disruptive result for the pound would be a hung parliament, and this is certainly a possibility. A Labour-led coalition is a more likely outcome than a Conservative-led one, but either result could put pressure on the pound.
If no party can form a majority, then the uncertainty over when and how a coalition will be formed could see GBP weaken.
Furthermore, coalition governments tend to find it harder to reach a consensus, and there may be other concerns. For instance, if Labour's pro-business stance is watered down by coalition partners, or if gains for the SNP raise the spectre of Scottish independence, then the pound could face further losses.
Whatever happens, the election could potentially bring notable volatility.
Protect yourself against volatility
If you're concerned about how currency volatility around the election could impact you, we can help. Currency is our speciality, and we'll use our expertise to create a risk management strategy tailored to your business.
For instance, we can help you set up forward contracts. These allow you to fix an exchange rate for up to a year, making it easier to forecast your profits and plan strategically for the future.
You can also use market orders to target exchange rates above or below the current market level. Your transaction will automatically be triggered if the market reaches that level, helping you capitalise on strong exchange rates and protect yourself from unfavourable movements.
Your personal business account manager can guide you through the various options and help develop a strategy that meets your unique needs. We'll also help you execute the strategy and continually evaluate its effectiveness, looking for ways to adapt to any changes and capture new opportunities.
If you want to find out more about our services, please do get in touch. Our team would be happy to find out more about your business and see where we can add value, and there's no obligation to make a trade if you decide to open an account.
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