The United Kingdom general election is taking place today (June 8,2017) as the country’s 650 parliamentary constituencies head to the polls to elect one Member of Parliament to the House of Commons. Elections are huge market-moving events because the politicians that emerge victorious at the polls often wield huge influence in determining the direction of the general economy.
The UK general election is particularly important to global markets because it serves as a test of popularity between the Conservatives and the Labour parties. However, it is interesting to observe that the global forex markets doesn’t seem to be paying much attention to the ongoing election in the UK.
Even though the forex market appeared to be unperturbed by the election, market bets on the potential volatility of the pound over the next 24 hours have surged to Brexit levels. Reuters market data shows that EUR/GBP implied volatility increased by has 35%. This piece looks at how the Pound (GBP) might fare against other major currencies in the forex markets when the election is finally over.
A Conservative majority could cause the Pound to surge
The general election is already causing the Pound to book some gains in the forex markets as pundits predict a majority for the conservative party. A conservative majority in parliament will increase the predictability of the UK’s government and we can expect the markets to continue its go-easy dance. Interestingly, the market has practically priced a conservative win into the value of the sterling; hence, you shouldn’t expect to see significant gains for the GBP in the forex markets.
In addition, UK Prime Minister, Theresa May will be able to consolidate her control of the government if the conservatives record a majority. Market analysts predict that a conservative win with a large majority could see the pound rising all the way to $1.330, an exchange level last recorded 8 months ago. Allan von Mehren of Danske Bank notes that “we maintain the view that if Theresa May consolidates her majority substantially it would be GBP positive.”
A Labour majority could cause the Pound to Slump
Many investors know that the Labor party doesn’t agree with Theresa May’s position on Brexit that a ‘no deal is better than a bad deal” in the Brexit negotiations. Hence, a victory for the Labour party could see Theresa May fighting some battles on the home front while negotiating the Brexit. If the UK is unable to present a united front during Brexit negotiations, you can expect the Pound to lose some of its value against rival currencies in the forex markets.
More so, a Labour majority will make it harder to predict the actions of the UK government because Theresa May will have less support from parliament. The increase in the inability to predict the plans and actions of the UK government will force investors to move to the sidelines on the pound until they are able to gauge the pulse of London more effectively. Market analysts predict that the GBP could fall as low as $1.24 in the next trading session after the election if the Labour party snags a surprise majority.