The Election and the impact it may have on the Pound
Well if the polls are anything to go by we are in for a real roller coaster ride in the next 24 hours as the U.K head into voting stations in what may be the closest election in decades.
With political certainty being one of the key factors that have an effect on the value of a currency, Sterling may struggle until we have cemented not only who will be running the U.K but also how they plan to approach their reign.
One of the best ways of putting it is that if you were due to invest in a business (i.e the U.K/Pound) then it is highly unlikely you would take the plunge until you actually knew who would be running that business and how they planned to run it. Until we have some clear results from this election then we are in exactly that position, therefore demand in the Pound slows and Sterling’s value could more than likely drop.
I thought it may be prudent to outline the possibilities that may arise in the coming days, weeks or even months and how they could impact on the value of the Pound.
First and foremost, it does look like there is now a slim chance of any party achieving a majority. A majority would be where they can set up Government solely without the need for seeking out other parties to join together with to form what is known as a coalition.
In the unlikely event that we do see a majority for the Conservatives then I would not be surprised to see Sterling gain a lot of strength as it would show certainty and also with the economy currently performing fairly well, should be taken kindly by the markets. A Labour majority may not be so positive for Sterling initially as we may see quite a lot of change on the horizon for the U.K therefore investors may hold back to wait and see what changes may be made.
It is fairly likely that once results are announced we may see what is known as a hung Parliament. This is basically where no single political party wins a majority in the House of Commons and this is where things can really start to get interesting.
Essentially, there are usually 12 days allowed for incumbent Government (current holder of political office) to attempt to form a coalition. This may be trickier than before as the current party involved in the coalition (Lib Dems) has seemingly lost a large amount of support after not keeping to key points of their manifesto during 2010.
During this period I expect large volatility for the Pound and a limit order/stop loss contract may be a prudent approach. This is where you can set a particular level you wish to achieve or a lower limit you do not want to buy below and either may be secured automatically for you should the market price become available. Feel free to email me (Daniel Wright) on [email protected] or call our trading floor line on 01494 787478 for more information.
After 12 days (although it did take 13 last time around) if the Conservatives have failed to put together a coalition then the largest opposition party may be asked to put together a coalition. This has every potential to end up being the Labour party attempting to put something together with the SNP (Scottish National Party).
Should this be the case then I feel Sterling may really suffer as the SNP have already commented that they would like to have another referendum on Scottish independence and I would be highly surprised that they would agree to anything without the potential of this taking place. When we had the vote for Scottish independence last year and the chance of a yes vote heightened, Sterling dropped off by over 4% in a few days so with the potential of this looming, even sometime in the future the Pound will more than likely suffer.
In the event that no party can put together a coalition then we may have a situation of ‘no overall control’ which was seen a number of times in the twentieth century. This would make life hard for the Pound and would lead to a second election later in the year and again may lead to a tricky period for the U.K and indeed the Pound for a number of months.
All in all if you are looking to buy or sell foreign currency in the coming days, weeks or months then it is extremely important that you make your account manager here at currencies.co.uk fully aware. If you are working to a particular budget then our contract options may be a sensible approach, you can book an exchange rate for anything up to a year in advance for just a small deposit, helping you to budget well in advance for the year ahead. If you would like any assistance or one of our friendly traders to explain the various options available to you then either email me on [email protected] or call us directly on 01494 787 478.