Exchange Rates Today: Pound to Euro, Aus Dollar and NZ Dollar Fall as Analysts Forecast Political Turmoil

January 7, 2015 - Written by John Cameron

STORY LINK Exchange Rates Today: Pound to Euro, Aus Dollar and NZ Dollar Fall as Analysts Forecast Political Turmoil

The Pound Sterling (currency:GBP) has endured a distinctly below par start to 2015. The UK tender has given up ground against the high yielding Commodity Dollars during the first week of the year, sending the GBP NZD exchange rate down to as low as 1.9472 during yesterday trading, while the Pound Sterling Australian Dollar exchange rate dipped to 1.8646 GBP AUD yesterday afternoon. The losses for Sterling against the risk-driven global currencies confounded some analysts who had predicted gains for Sterling against AUD and NZD thanks to a pronounced shift out of risk by investors which sent global stock markets sharply lower.

Meanwhile, the Pound euro exchange rate threatened to break down through the 1.2700 threshold late yesterday, having started the year by briefly breaching the 1.2900 level.

So what is holding back the Pound Sterling?

The answer may well lie in the current political landscape in the UK. The UK electorate will go to the polls in order to decide the make-up of the next British government at the start of May. The consensus opinion amongst political analysts is that the election result will see no single party gain an overall majority. The ‘first past the post’ political system which the UK operates threw up a ‘no overall control’ result at the last General Election in 2010 and a repeat of this outcome would inject a large dose of uncertainty into the UK economic situation.

Kevin Daly, analyst at leading investment bank Goldman Sachs concurs with this view, stating in a research note yesterday that, ‘the likelihood of any party gaining an overall majority appears low, but we think the Conservative Party is marginally more likely than Labour to win the most seats and lead the next government.’

The market abhors uncertainty, so the potential for a lack of clear-cut governance in the UK post-May, which is accentuated by a surge in support for relatively minor political parties, including UKIP the Scottish National Party and the Greens, could see the Pound Sterling leek support during the middle part of the year. Perhaps the most damaging outcome following the election would be the formation of a fragile ‘rainbow alliance’ which lacked the consensus or conviction to effectively push the UK’s interests forward.

If the Conservatives do indeed win more seats than any other party, but fall short of gaining a working majority, then a ruling Conservative / UKIP coalition may be the upshot. The price the Tory party would have to pay to retain power in such a situation could be a British exit from the European Union – a move which economists estimate could knock as much as 10% off the UK’s annual Gross Domestic Product. The forecast for the Pound Sterling in the run-in to the May General Election is therefore subdued.

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TAGS: Australian Dollar Forecasts Currency Predictions Euro Forecasts Eur Forecasts