Home UK election focus: How might the election result impact the pound?

UK election focus: How might the election result impact the pound?

Posted by on June 21st, 2024.

The UK went to the polls last week to decide who will lead the country for the next five years.

In recent years we have seen UK political events infuse significant volatility into GBP exchange rates, including the Brexit saga, Boris Johnson’s resignation and Liz Truss’s disastrous mini-budget.

However, these swings didn’t really materialise this time, with the pound trending broadly higher ahead of a widely expected Labour victory.

What happened during the election?

Keir Starmer’s Labour Party secured an overwhelming majority in the UK election, obtaining 412 seats. The Conservatives, led by Rishi Sunak, on the other hand faced a historic defeat, managing to hold only 121 seats. This result marks a significant shift in the political landscape, as Labour assumes office for the first time since 2010, ending the Conservative Party’s 14-year tenure.

The impact on the pound so far

Since Sunak called the election on 22 May the pound has trended broadly higher, with GBP/EUR striking a 22-month high and GBP/USD spiking to a three-month high, before retreating.

However, the bulk of this movement has been attributed to other factors, such as reduced Bank of England (BoE) interest rate cut bets in the wake of stronger-than-expected UK inflation figures.

Following the election the pound has appreciated, but these gains have been fairly modest in scope as Labour’s victory had already been priced in by GBP investors.

Labour promoted itself as the ‘pro-growth’ party in its manifesto, and the party went to great lengths to position itself as a fiscally responsible party which will balance the books and not raise taxes during the election race.

This appears to be resonating with markets so far, with Goldman Sachs upgrading its UK growth forecasts for 2025 and 2026 immediately following the election.

In her first speech as Chancellor, Rachel Reeves outlined her initial plans to boost UK economic growth, optimism over which appears to have already provided some support for the pound.

How might the pound move in the weeks and months to come?

Forecasting exactly how Labours first 100 days in office will shape the pound is difficult as markets are still waiting for the new government to outline its policy priorities.

We likely won’t get a proper look at Labour’s fiscal plans until a little later in the year when Reeves is expected to deliver her first autumn statement.

However, hopes that Labour will usher in a new period of political stability, following a turbulent few years under the Conservatives could reflect positively on Sterling, particularly amid expectations this will encourage investment in the UK.

In the meantime, the focus may shift back to the Bank of England (BoE), as policymakers are able to publicly discuss monetary policy again, after a self-imposed communications backout in the lead-up to the general election.

GBP investors are increasingly confident the BoE will begin cutting interest rates from August. Any signals from the bank indicating this may be the case could trigger a slump in the pound.

Protecting yourself against future volatility

If you are planning a transfer and are worried about potential currency volatility stemming from the UK election, you may want to take steps to protect your money from any unfavourable shifts in the currency market.

With TorFX, you’ll enjoy excellent exchange rates and no transfer fees as well as having access to a range of services which can help minimise your exposure to currency risk.

For instance, with a Forward Contract you can fix the current exchange rate ahead of making a future transfer. While locking in a rate in this way would mean you’d miss out if the exchange rate strengthened, your transfer would be protected from any negative market movements.

If you want to hold out for a more favourable exchange rate, you can set up a Limit Order. Simply set the exchange rate you want to achieve and your transfer will be triggered automatically if your target rate is reached.

Get in touch to find out more about how you can take proactive steps against potential currency volatility.

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