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What Currency Bears the Brunt of UK Election Jitters?

GBP
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June 7, 2017 By: , No Comments

The UK general election takes place on Thursday, 8 June. 650 parliamentary constituencies will go on the ballot, as Prime Minister Theresa May seeks to reestablish herself with a greater parliamentary majority. Her opposite number, Jeremy Corbyn of the Labour Party is intent on upending her plans, and polls confirm it is going to be a closely fought contest. YouGov Election Centre data indicates 42% of the electorate is likely to vote Conservative and 38% Labour. That translates into a 304-seat majority to the Tories and 266 seats to Labour.

By late Tuesday, 6 June 2017, the Conservatives have a healthy lead of 42.9% over labor at 37.2%. These poll averages are likely to hold until Thursday. The University of East Anglia anticipates that the Tories will win a total of 368 seats in parliament, picking up 38 seats at the expense of Labour. The Tory lead dropped precipitously since early May, but in the dying hours of the election campaign they have gained the ascendancy. The majority of middle-class and working cost voters side with Conservatives, but the 18 to 24-year age group is largely aligned with Labour. The election hysteria coupled with the ever-present threat of terrorism has rattled nerves in the investment community.

How is the GBP reacting to the UK election?

One thing about the GBP is its resilience to geopolitical shocks and market anxiety. We have seen this repeatedly. The UK economy is robust, and continues to defy gravity with the GBP trading in a tight range against its peers. The GBP/EUR pair gained 0.3% to trade at 1.149 as currency traders sought out safe-haven assets. The dismal failure of pollsters to correctly forecast the outcomes of the Brexit referendum and the US presidential election has led to more inventive ways of anticipating likely election results. There is significant uncertainty in financial markets right now. FBI director James Comey set to testify on Capitol Hill on Thursday, 8 June – the same day that Britons go to the polls. This could be a critical and defining moment in the Trump presidency, for it may reveal details of collusion between the Russians and the Trump campaign.

The disgraced former FBI director is expected to drop a bombshell when he testifies, and markets will be bracing for the outcome. What typically happens in these types of situations is that investors and traders seek safe-haven assets to shore up their financial portfolios. One of these is UK government bonds – gilts. The other is gold. We already know that gold bullion is trading close to $1,300 per ounce, and rising.

A picture of rising uncertainty is forming in the financial markets. With increasing demand for UK gilts, the GBP is a natural beneficiary. We have seen strong gains in the pound against its major trading partners. Consider the following gains: the cable is trading at 1.2908, the GBP/EUR is trading at 1.1447, and the GBP/JPY is somewhat lower at 141.309, but remember that the Japanese Yen is a natural safe-haven currency.

UK Economy Remains Strong

Sterling strength remains the short-term preference for investors ahead of the general election. But it’s economic data releases in the UK that are bolstering support for the sterling. The ICAEW released data showing that business confidence is at its highest level since June 23, 2016. A reading of 6.7 was reported, indicating significantly more optimism than pessimism. One of the problems in the UK remains inflation. While prices are steadily rising, wages and salaries are slow to respond.

Businesses are also passing on these rising costs to consumers, since imports are now more expensive. Instead of the GBP taking a pounding from the uncertainty, it’s the EUR in the crosshairs. Thursday’s ECB meeting will likely not reveal any change to monetary policy, with the European Central Bank continuing to purchase €60 billion per month and no changes to interest rates until quantitative easing has concluded. This could send the EUR lower, and this will provide short-term relief to the GBP.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.

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