Whether you love them or hate them, UKIP has been gaining popularity with the public in recent years and two Conservative party politicians (Douglas Carswell and Mark Reckless) defected to UKIP toward the end of 2014—a move that had a ripple effect on the foreign exchange market as investors prepared for a messy election.
Furthermore, the new UKIP politicians reflected badly on the current Conservative government and Prime Minister David Cameron.
UKIP’s European Election Win Triggers Foreign Exchange Market Movement
Last year, UKIP won the European election, which made them the first party in 100 years to beat Labour and the Conservatives in a major vote, another event that signalled all bets were off in the 2015 general election. The progress came in stark comparison to the first European election twenty years prior when UKIP gained only 1.0% of the votes.
The move was hailed as an ‘earthquake’, UKIP leader Nigel Farage explained: ‘Never before in the history of British politics has a party seen to be an insurgent party ever topped the polls in a national election.’
There have been many suggestions as to why citizens may want to vote for Nigel Farage’s controversial party; is it because people are discontented with the same prominent political parties battling with each other? Is it because UKIP represent something different from the norm? Or is it because Farage is more relatable to other head honcho’s such as Cameron and Ed Miliband?
Pound Sterling to Euro (GBP/EUR) Exchange Rate Forecast
Whatever the reason, we’re looking at what would happen if UKIP won the UK general election and how that may affect the British economy and the way in which the Pound Sterling to Euro (GBP/EUR) exchange rate trades.
One of the most pressing matters on many voters’ minds is the possibility of a British exit from the European Union, a so-called Brexit.
Brexit Fears could Pressure Pound Sterling to Euro (GBP/EUR) Exchange Rate Lower
If there were any whiff of the UK leaving the EU, the Pound Sterling to Euro (GBP/EUR) exchange rate would initially drop as uncertainty swept the market. Investors don’t like doubt and therefore the GBP/EUR currency pair could remain soft for some time until a level of stability was built.
Last year the Scottish referendum played havoc with the market as conflicting polls weighed on market forecasts. Would the UK’s growth be stunted? Would the Pound Sterling exchange rate depreciate? What would happen to the UK government? These and many more questions allowed the Pound Sterling to Euro (GBP/EUR) to fluctuate, until markets were confident enough that the risk of Scotland breaking the United Kingdom up was pretty low.
The prospect of Britain leaving the European Union is a topic of heavy debate; would the UK prosper and be better off? Or would it lead to drastic currency depreciation, economic stagnation or contraction and years of hard recovery?
At present, Brussels has a large amount of control over several key areas of the UK economy, including immigration and the legal system, not to mention we hand out large amounts of money (reported to reach as much as £20bn) for the European Budget every year.
Does the ‘Failure of the Euro’ Exchange Rate Support Brexit Case?
UKIP politician Mark Reckless stated: ‘Many of those who are now saying that Brexit would be a terrible thing for the country were the same people who were arguing very strongly that we should join the Euro. The obvious failure of the Euro combined with remarkable growth of emerging markets outside Europe and the relative success of the United States when compared with Europe – all of these are major factors which make it very difficult for people to argue to stay in the EU, and will make people feel that it’s much better for them economically to leave.’
But it’s not that simple. For Britain to leave the EU we’d have to cut our current economic, military and cultural ties to the EU and many experts believe a recession would sweep over the UK; and we all remember the global financial crisis of 2008 don’t we?
UK GDP Forecast to Tumble on Brexit – Pound Sterling Exchange Rate to Soften
Furthermore, economists have also suggested that the UK’s Gross Domestic product (GDP) could be hit worse than when then Great Recession hit, suffering up to a massive 9.5% loss according to the Centre for Economic Performance.
However, many are suggesting that a contraction in growth would be a small price to pay when the UK economy could thrive in the long-run. UKIP suggests the UK could save up to £10 billion per year just by leaving the EU. It’s worth noting that if the UK did leave the EU, the Pound’s climb back up in the foreign exchange market would probably be a long one, but it may strengthen further.
UKIP wish to hold a referendum for British citizens this year if it were to win, a bold move to undertake so soon after entering office. However, maybe it’s time British citizens were given the opportunity to decide whether or not they wish to remain within the EU and take back decision making power from Brussels. Whether the UK opted to leave or not, the referendum could be an event that would see the Pound Sterling to Euro (GBP/EUR) exchange rate sink.
Other policy points that UKIP wishes to address include immigration; UKIP wants to implement a points based system for anyone entering the country. Additionally, UKIP plan to save money in benefits by cracking down on the way in which immigrants receive government funding. UKIP also wish to remove the current account deficit within three years and create a surplus, as well as reducing foreign aid spending dramatically.
UKIP’s Political Change could Cause Pound to Soften, but a Weaker Sterling Exchange Rate could Bolster UK Exports
If UKIP were to win an outright majority (an extremely unlikely possibility), much of the UK’s economy would undergo change; an event in itself that would see the Pound Sterling to Euro (GBP/EUR) exchange rate extremely vulnerable for some time. Economists would be constantly debating how political policy could impact the economy following the general election and any failure could lead to a very unhappy nation, a weak currency and prolonged growth struggles.
However, if the change were to prove fruitful for Britain, in line with UKIP’s forecasts, the Pound Sterling exchange rate could eventually recover to be stronger than ever amid a flourishing society. It’s also worth noting that a weakened Pound Sterling exchange rate is not necessarily a bad thing as it could help to increase UK exports and improve growth in that respect.
— Robin Brant (@robindbrant) May 7, 2015
Our forecast now 329 Con 233 Lab
— Laura Kuenssberg (@bbclaurak) May 8, 2015
The Pound Sterling to Euro (GBP/EUR) exchange rate is currently trending in the region of 1.3746.