Currency Moves: GBP unfazed by U.K. election announcement

There has been little reaction in the GBP exchange rate to Wednesday’s news that U.K. Prime Minister Rishi Sunak has called a surprise early United Kingdom general election. GBP has remained unfazed by the election announcement for a number of reasons.

1. Because the ruling Conservatives Party trail the opposition Labour Party by a significant margin. So, the prospect of ‘hung parliament’ appears very unlikely. In the past, hung parliaments have been the largest political factors generating significant changes, and downward pressure, on GBP.

2. While there are differences in the policies between the Conservatives and Labour, they are relatively minor as far as the exchange rate is concerned. There are no major policy differences which suggest a dramatic change to the government’s fiscal stance, in terms of it being significantly more contractionary or stimulatory for the economy, such that it will generate a material impact on UK inflation, and the Bank of England’s interest rate settings.

3. GBP exchange remains more influenced by how soon the Bank of England is likely to reduce interest rates. Market pricing for future changes in interest rates currently show a 96% chance of -0.25% reduction in the official Bank Rate from 5.25% to 5.00% by November 7, 2024. This is a delay to what was priced a few weeks ago, that showed August 1 was the most likely date in which the BoE would reduce interest rates, but it is unrelated to the announcement of the UK election.

4. Movements in the USD are making a larger influence on the GBP exchange rate. Mid-April’s release of the stronger-than-expected US March CPI inflation measure was a significant factor in causing the USD to strengthen, and for GBP to decline to 1.2300 its lowest levels this year. The USD strengthened because expectations of how soon the US Fed would cut interest rates were delayed.

In terms of the GBP/EUR exchange rate, it continues to sustain levels at the upper-end of its one-year range around 1.1750 because of the strong likelihood the European Central Bank will cut interest rates -0.25% at its June 6 meeting lowering the ECB’s deposit rate to 3.75%.

While the market remains stable now, this is the perfect time to plan, prepare, and hedge your upcoming FX needs. One shift in the polls or a major change in party policies could trigger significant volatility.

Don’t get caught out by unexpected market movements— act now to ensure you're well-prepared for any potential fluctuations. Contact us to discuss your strategy and protect your FX positions.

The content within this blog post is not intended for use as financial advice. This content is for informational purposes only.