UK election sparks surge in Pound ahead of Brexit negotiations

Theresa May’s shock announcement for plans to hold a General Election took not only Westminster by surprise, but the markets too.

The pound rose to a five-month high, coming up at almost 3% against the dollar and ended with one of the best days since the EU Referendum last June.

This has prompted banks like Deutsche Bank and Credit Suisse to reconsider their forecasts that Sterling would continue to weaken, instead planning to bump up their predictions of the pound against the dollar – encouraging investors to buy, not sell.

In a note that Deutsche Bank released, they called the general election a “game-changer” for Sterling.

The election announcement has bolstered the pound to its highest level against the euro this year and a seven-month high against the dollar, making a currency transfer a good-looking investment.

Why has the pound gone up?

While investors normally see elections as causing uncertainty, in the UK’s current context it will actually create some certainty around Brexit.

If the Tories win the General Election, it will give May a stronger position from which to negotiate.

There is also speculation that by holding the election now rather than waiting for the next scheduled one in 2020, EU leaders cannot put political pressure on May in the final Brexit talks.

Commenting on the pound, Chancellor Philip Hammond said that the jump demonstrated “the confidence that the markets have in the future for this country under a Tory Government with a new mandate”.

Economist at UBS wealth management, Dean Turner, said: “Sterling has staged a healthy rally against the USD dollar over the past couple of months, given an additional boost by the announcement of the election.

What looks like an inevitable landslide for the Conservatives should give Theresa May more freedom to compromise with the EU and improve the odds of reaching a deal.”

Trevor Greetham, Head of Multi Asset at Royal London Asset Management, said:

“Sterling has taken the news of a snap general election positively, as while it means increased political uncertainty in the near term, it probably means less uncertainty in the longer term.

“If Theresa May gets a significantly increased mandate it will strengthen the UK’s position in Brexit negotiations.”

Jeremy Cook, Chief Economist at World First commented: “Sterling originally leapt to six and four month highs against the EUR and USD respectively as the election was announced.

“The positivity stemmed from a belief that a mandate for Theresa May would allow for a softer Brexit than most had feared, although the manifesto seems to rule that out with the election also scaring investors that had bet on pound weakness into equalising their positions.”

Another factor in the pound’s strengthened position is the economy. A fast growing economy typically attracts foreign investment. With unemployment rates at their lowest since 2005 and a rise in consumer spending, the UK economy has so far outperformed forecasts, despite the Brexit vote.

Long-term effect

With speculation over whether the vote in June will give May a majority, lead to a ‘hard’ or ‘soft’ Brexit, or if the Lib Dems will gain ‘Remainer’ votes, the pound is staying strong.

Shilen Shah, Bond Strategist at Investec Wealth & Investment, observed: “Despite a particularly noisy week with all three major political parties launching their manifestos, Sterling has been resolutely calm since the election announcement rally.

“Some of the calmness has been driven by relatively robust UK economic data, with both retail and employment prints showing a degree of resilience, even if the inflation increase is starting to eat into real wages.

“At this stage, the election looks a foregone conclusion as the market’s Sterling’s related anxiety towards Brexit is currently at a hiatus.

“The FX market seems to be taking the words of the PM literally, with her suggestion that a large Conservative majority will give her increased flexibility in any negotiation with the EU.”

Saskia Johnston, foreign exchange expert at Sable International, commented that forecasts expect the Conservative party to gain a greater majority in the election, “in turn giving Theresa May more authority on Brexit negotiations. Market sentiment expects this result to cause longer term strength in the pound as the outcome of negotiations with the EU is expected to be more predictable.”

Robert Sinclair, Chief Executive of the Association of Finance Brokers, also commented: “The decision to call the General Election with the opinion polls so favourable to the sitting government provides the likelihood of stability for the UK for longer.

“An expanded Tory majority looks likely, giving Theresa May authority to negotiate in Europe with less pressure from the UK political opposition. This means that currency markets see a more stable future in the short to medium term with Bank of England support available to underpin the economy.

“All of this has strengthened the view that sterling, despite offering poor interest rates, remains a very safe haven and the UK remains a positive place to invest.  This has done much to underpin a recovery in sterling’s value.”

Jake Trask, FX Research Director at international payments company, OFX, was also positive about the future of sterling, saying: “We could see a further uptick towards 1.31 against the dollar should May win a landslide victory.”

As the General Election gets closer, if all predictions remain true, the pound looks to remain strong, making ForEx an appealing market to trade in.

There is a lot of talk about how to trade on the FX market but it’s prudent to only buy what you understand.

While some may favour the traditional broker, there are now plenty of reputable online brokers that don’t involve time-consuming meetings.

Look for ones that offer education on foreign currency and allow you to make test trades up to a certain ‘value’.

 

 

 

 

 

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