Losses Forecast for Pound Sterling (GBP) Exchange Rate After UK General Election

April 8, 2015 - Written by John Cameron

STORY LINK Losses Forecast for Pound Sterling (GBP) Exchange Rate After UK General Election

The UK General Election takes place in just over four weeks and analysts forecast that the outcome could have a marked effect on the Pound Sterling during the short to medium term.

The last British General Election saw the Conservatives miss out on an overall majority by a couple of dozen seats. The Conservatives quickly formed a working coalition government with the Liberal Democrats in the days which followed the result and against the expectations of most commentators, the coalition has lasted the full five year term.

One possible outcome of next month’s election would be a Conservative majority and only a slight swing to the right from the electorate would make such a result a reality. Although this would give the UK economy clear stewardship, it may not be a good result for the Pound Sterling. The rise of the UK Independence Party during recent years has forced the Conservative Prime Minister David Cameron to promise an in/out referendum on a British exit from the European Union before the end of 2017 if his party wins this year’s election. Analysts forecast that a potential UK exit from the EU would cause a reduction in the nation’s Gross Domestic Product of between 8 and 10%. The prospect of a new British recession, which could even be deeper than the one which followed the Credit Crisis of 2008, would hit Sterling hard.

Meanwhile, the Labour party is the only other political force with the potential to win an outright majority on May 7th. Rightly or wrongly, the market’s perception of the Labour party is that it remains fervently ‘anti-business’. For this reason, an outright Labour victory would also hurt the Pound Sterling into the medium term. A result which would hurt the Pound even more would see the Labour party attempt to govern as a minority government. Such a situation would see Prime Minister Ed Miliband seek the support of minor parties on a vote-by-vote basis in order to pass individual laws. If opinion polls are to be believed, the Scottish National Party (SNP) would be likely to hold a strong hand in such a situation. If the SNP wins 40-50 seats next month, as per expectations, then they would be in a strong position to push forward their anti-austerity policies. Again, market participants would vote with their feet and move out of Sterling-denominated assets as a consequence.

Analysts therefore forecast that almost any outcome from the May 7th ballot will hit the Pound Sterling hard.

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