What Impact with the UK Election Have on Cable?
Britons are headed to the polls today, and are widely expected to vote for a new Prime Minister. The shift in parties in control of the government often has implications for fiscal and monetary policy, which shakes up the price of the currency. Already the UK elections have had an impact on the pound, as it is understood that the BOE held pat at the last meeting in order to stay out of the political discussion.
Polling has been fairly consistently showing that Labour will win by a considerable margin, with estimates suggesting they will likely win 470 seats. The incumbent Tory party is expected to see their 376 seats chopped down to just 61, in what the headlines on Friday will likely call an electoral disaster for the Conservatives.
What Will Drive Currency Pairs
But, as far as the markets are concerned, the certainty of the outcome is what matters, as it allows for pricing in the results ahead of time. This means there could be relative calm in the markets in the immediate aftermath of the UK election.
Historically speaking, a new Labour government coming into power has been a bad sign for the UK economy, with the pound weakening and stock markets crashing in the following months. But, analysts point out that it has more to do with timing than as a reaction to the new government. For example, Labour taking over 10 Downing Street right before the oil crisis of the ’70s, or right before the economic chaos of the ’30s.
Keeping an Even Keel
The presumptive new PM, Labour leader Keir Starmer, and his party have taken pains to reassure the markets that there won’t be any major changes. That includes Shadow Finance Secretary (Chancellor) Rachel Reeves, a former banker and who got her start at the Bank of England. Fiscal policy is expected to remain unchanged, particularly considering the constraints of the current financial situation of the government. Over all, market analysts see little difference in the fiscal policy between Conservatives and Labour, which would likely reduce the impact of the elections.
That having been said, there are evidently some differences. Labour is expected to spend more, and tax more. This is generally seen as positive for the pound, as higher government expenditures would likely keep up inflationary pressures. In turn, the BOE would be slower to cut rates, supporting the pound.
What About Surprises?
However, given the several months of expectation for the UK election, and a whole month of campaigning ahead of the event, the market has had plenty of time to adjust to the potential impact after the close of polling. What could jolt the market, however, is if the new PM makes some unexpected announcements in his first speech upon taking office.
The other wildcard is the effect of the Reform party, which has split the Conservative vote. Currently, it’s not expected to gain all that many seats, despite at times beating the Tories in polls. But the unlikely scenario of Reform surprisingly winning enough seats to become the main opposition party could shake up markets a little bit, as it would add a measure of uncertainty.
