The UK election’s influence on the pound is likely to be limited amid widespread expectation of a Labour victory, according to the CEO of a leading independent financial advisory and fintech.
The prediction from Nigel Green, deVere Group chief executive, comes as Britain heads to the polls on Thursday, July 4, with the current opposition Labour Party projected to win, and Sir Keir Starmer will be Britain’s next prime minister. Many polls indicate that Rishi Sunak’s Conservatives could face an existential crisis after 14 years in power.
“The pound’s recent performance indicates that the market has largely priced in the likelihood of a Labour win, which means the outcome of the election will be muted on currency markets,” said the deVere CEO. “In recent weeks, the GBPUSD exchange rate has demonstrated a relatively stable pattern, suggesting that investors are not anticipating significant upheavals.
“The prevailing opinion among market participants is that a smooth transition to a Labour government will occur, thereby avoiding the uncertainty of a hung parliament. This confidence is mirrored in the consistent behaviour of the pound, which is showing minimal fluctuations,” said Green.
Potential Surprises
One of the key indicators reflecting market sentiment is the level of implied volatility in the GBPUSD pair. Implied volatility represents the market’s forecast of a likely movement in the currency exchange rate and is a crucial metric for gauging investor expectations. Currently, this measure remains subdued, reinforcing the notion that traders foresee limited disruption from the upcoming election.
Despite the prevailing calm, the market remains poised for potential surprises. If the election were to yield an unexpected result, such as a Conservative win or an indecisive outcome leading to a coalition government, there could be significant reactions in the currency markets.
“The current low implied volatility suggests there is ample scope for substantial movement should the election deviate from expectations. Traders are prepared to react quickly to any unforeseen developments, which could inject volatility into the market,” noted Green.
He added that, “the recent French elections serve as a timely reminder that financial markets must remain cautious and not assume stability in uncertain political climates. Similarly, the pound has shown its capability to cause significant upheavals in forex markets. Since the 2016 Brexit referendum, sterling has experienced several dramatic declines, including the notable drop to a historic low during the aftermath of Liz Truss’s leadership issues.”
The deVere Group CEO concluded that, “we expect the UK election impact on the pound will be limited as markets have already priced-in the widespread expectation of a Labour victory. However, the potential for unexpected results means that traders remain vigilant.”
