Would Another General Election Signal Trouble for the Pound?

There was undoubtedly some scratching of heads why the Bank of England (BoE) and its director Mark Carney decided not to raise the base rate of interest.

Most economists saw this as a sensible economic decision, however, thanks largely to the sustained devaluation of the pound (GBP). After all, the GBP has been trading in a restricted range against the Dollar (USD) and the Euro (EUR) since the decision was taken to leave the European Union, and this has been a key factor in triggering a disproportionate rise in inflation. By maintaining a minimal base interest rate and attempting to inspire a recovery in the pound, it is hoped that the cost of living will begin to fall in the UK.
So event though the decision caused an immediate decline in the value of the pound, the decision has been taken with the long-term health of the currency in mind.

How Would Another General Election Impact the Frail Pound?
Make no mistake; it is the underlying weakness and volatility of the pound that has inspired the recent decision taken by the BoE. This should also impact on other economic and political decisions too, particularly given the uncertainty that has been created by the recent snap election and the commencement of Brexit negotiations.
With this in mind, the notion of another general election in the UK may be one that is too much for the markets to bear. It is also not out of the question, however, with the Tories struggling to make a deal with the Democratic Union Party (DUP) and form the majority government required operate effectively. If a coalition or minority government is not called soon, there is every chance that another election would be called before 2017 is out.

The question that remains is how would this impact on the GBP? Much would depend on the timing of the election and the eventual result, of course, as Theresa May’s decision to call the first snap election in June actually saw the pound rise to its highest level for six months. The main reason for this hike was real-time polling results and the perceived confidence in the Tory government, which many felt would translate into a landslide election win, a huge majority and a strong mandate to deliver a predictable Brexit (and other economic policies).

 

 

While brokerage platforms such as ETX may have seen the value of the pound increase in the short-term, however, this trend quickly reversed. As it became apparent that the Conservatives were unable to engage the electorate with a perceived message of fear and austerity, Labour began to win over voters and close the gap in the polls. This created huge uncertainty about both the eventual result and the future course that Brexit would take, while the subsequent hung parliament and forced the pound back into a narrow trading range.

Ultimately, this means that the announcement of a second election would most likely trigger a further decline, while it is also highly doubtful that any of the major political parties would be able to secure a majority. This, when allied to the strength of the USD and sense if political unity that has been restored to the EU, points suggests that our currency could not sustain another bout of uncertainty and unclear decision making.

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