The market is now firmly expecting a strong Theresa May victory in the UK elections on June 8th. With investors betting this will lead to much less chance of any hard version of Brexit sterling is much stronger on all of this anticipated good news. Please excuse me for not being quite so positive but I do see some big risks ahead which could easily see the pound come unstuck down the line. Whilst clients holding sterling hoping for improvements are arguably in a very strong position a degree of caution should be applied. Markets will often prove the majority wrong leading to expensive mistakes!
Size of Majority – Much is being made of the huge ‘landslide’ victory Theresa May and the Conservatives could win but should this fall short expectations sterling would struggle. The market appears to be pricing in a very strong win which could easily disappoint and see sterling come unstuck.
Previous Election Performance – Whilst the pound rocketed after the last two elections this was because the election result was unexpected. In 2010 it was predicted to be a coalition with Labour and possibly the Lib Dems. The resulting Tory and Lib coalition was unexpected and helped the pound to rise owing to both parties desire to tackle the deficit.
2015 was supposed to be a tight contest but with the Tories winning a huge victory the pound rocketed. Again this was unexpected so the surprise saw sterling jump. With this election it is very much expected Theresa May will win so the likelihood of a huge swing higher for the pound is not as high as many predict.
French Election – The French election is a good guide to what might happen once the results are out. Markets were largely expecting a strong Macron victory and despite his solid victory the Euro still weakened. This was in the main down to the fact that with the result being expected the market then focused on other concerns. I feel this could also be true with May and the UK election, once the result is confirmed there will then be much larger questions over the Brexit and how May will take all of this on.
Finally a stronger pound means Inflation will not be rising quite as fast as expected. Therefore any calls for interest rates to be raised could fall well short of the previous expectations and also contribute to a lower pound. We will get the first news on this today with the latest UK Inflation data released at 09.30 am UK time.
If you have a transfer to make we are specialist currency brokers who have worked together for years assisting both private and business clients in the planning and execution of their exchanges. Despite the pending election with sterling up at much improved levels there are I believe some very strong arguments for looking at relevant currency strategies sooner than later to minimise the risk of any future volatility.
For a free, no obligation discussion of your position please contact me Jonathan Watson by emailing [email protected].