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What Impact will the Election Have on Pound Exchange Rates?

It’s less-than 24 hours before the results of the UK general election will be known. Pound exchange rates are currently treading water, with investors quietly confident of a positive outcome, but cautious enough to wait and see before changing their positions.

But what will the Pound do after the results are in? We take a look at the four main options and how they will likely affect GBP exchange rates.

Outcome 1: Strong Conservative Majority

Should the Conservatives manage to steal seats from Labour, Sterling is forecast to race higher. Markets want to see a strong majority so that the Tories can push on with their Brexit plans, free from disruption and delay from the opposition.

Right-wing governments are traditionally perceived as being better economic stewards, with Jeremy Corbyn’s proposed spending plans causing some concern amongst investors. Another Tory government will therefore be welcomed by those invested in Sterling.

Outcome 2: Weaker Conservative Majority

If Theresa May returns to power with the same, or fewer, seats than previously, the markets are likely to sell the Pound.

There are enough Europhile MPs on the Tory backbenches as it stands to threaten May’s plans should they side with Labour when voting on key issues. In particular, it would be harder for May to carry out her ‘take it or leave it’ pledge with regards to the final Brexit deal agreed with the EU.

Parliament gets a final say, but if it rejects the deal May has claimed the UK will simply walk away with no agreements in place, rather than return to the negotiating table. A weaker majority means Parliament is more likely to reject the deal and force her to seek amendments.

Outcome 3: Labour Party Wins UK General Election

This is the most unlikely but, then again, it wasn’t so long ago that markets and analysts were claiming that Brexit and President Donald Trump were virtually impossible.

If Labour were to gain a majority, the initial reaction from the currency markets is likely to be one of shock. GBP exchange rates may plummet, but losses could quickly be recovered and Sterling could rack up gains once traders have had a chance to think it through.

Jeremy Corbyn has a softer approach to Brexit, with many in the Labour Party having opposed the tough stance Theresa May has attempted to take ahead of the beginning of negotiations.

Labour differs on key points such as attitude towards EU citizens already residing in the UK; they want to guarantee their rights in the hope that Brussels reciprocates by ensuring UK expats can remain in their EU homes, while Theresa May has claimed she will only assure EU nationals their rights if UK nationals are given the same treatment.

Markets are resigned to the fact that the UK is likely heading for a ‘Hard Brexit’, but that doesn’t mean they wouldn’t prefer a softer approach. The Labour Party may offer that, which could reignite hopes that the UK will be able to remain in the single market and therefore push the Pound higher.

Outcome 4: Hung Parliament

From the market’s point of view, a hung parliament would be the worst outcome. This would stymie Theresa May’s Brexit plans and could leave the country unable to progress due to the stalemate in Parliament.

While investors don’t necessarily want a ‘hard Brexit’, they’d prefer a quick divorce to an uncertainty-riddled process delayed by years as the government battles against the opposition party to put its plans into action.

Kallum Pickering, Senior Economist at Berenberg Bank didn’t beat around the bush; ‘All hell could break loose metaphorically speaking, at least at first’.

GBP Exchange Rates

The GBP EUR exchange rate is currently trading at 1.15, while the GBP USD exchange rate is trending around 1.2936.