How will the general election influence the currency market?

2nd May 2015 by LauraParsons

The Pound Sterling is set to experience significant movement over the coming days as the May 7 general election draws closer. The outcome of the vote is far from certain, and the result is expected to be the tightest since the 1970’s, as neither the Labour nor Conservative parties are expected to form a majority government.

As uncertainty is one of the things that market analysts hate the most, any election creates volatility in the monetary markets. The difference this time, however, is that support for the traditional establishment parties has faltered and other, smaller groups have risen in popularity.

Typically, the Pound tends to firm if it appears that the Conservatives will take power. This is because the party is normally expected to rein in spending and manage the economy responsibility. If it appears that Labour are gaining the upper hand then typically the currency will soften as the party is more likely to be spend happy and focus on socialist programmes.

This time however, economists are torn.

Some economists have said that this time the Pound could advance if Labour takes the lead in the polls. This is because Ed Milliband is more likely to reach a coalition agreement with the Scottish National Party (SNP) and limit the length of time of coalition negations. The party is also seen as the more likely to spend on public projects, which could be an advantage to the overall economy.

Meanwhile, David Cameron’s pledge to offer the British people a referendum on the nation’s membership of the European Union is being regarded by some economists as a potential risk to the UK economy.

If the polls stay as they are, with Labour and Conservative neck and neck, speculation will increase as to what shape the next government will take. Will Labour join with the SNP? Alternatively, will the Conservatives get themselves into the position of forming a coalition of other right leaning parties such as Northern Irelands Democratic Unionist Party? The wild cards in the scenario are the Liberal Democrats and United Kingdom Independence Party (UKIP) as those parties have the potential to become king makers.

As the UK has no single constitutional document, and has what is known as an unwritten constitution, there is no time limit for how long potential negotiations could drag on.

The worst-case scenario would be that no party wins enough seats for a majority and that no consensus is reached on the forming of a coalition government.  If this scenario plays out, we can expect to see the Pound take a battering from the other currencies.

Leave a Reply

Your email address will not be published. Required fields are marked *