By Christopher Nye senior editor Smart Currency Exchange
After several months where interest rates have been driving exchange rate changes, since May it has been all about politics once again. Don’t let the elections damage your budget, speak to an expert today.
Sterling has gained ground in recent weeks against the euro, due to politics. But why is that happening and where might GBP/EUR go next?
The announcement of the UK general election saw sterling strengthen against the euro, but so did the announcement of the French general election too. How can both happen?
It’s all about political stability and impact of that on the economy. The currency markets, powered by large financial institutions buying and selling huge amounts of currency, are not political as such, they just want good governance.
They supported sterling on the basis that a large Labour majority with a strong mandate will be good for business and seem confident in Rachel Reeves as chancellor. They are fearful of a National Rally (RN) win in France on the basis that it will be bad for business there, leading to overspending and fiscal irresponsibility in the style of the brief Liz Truss rein.
The immediate future
With a Labour Party victory priced in to sterling now, any unexpected departure from that, such as a hung parliament, will likely cause sterling to weaken next week. But the markets are not anti-Tory as a rule and will want a strong opposition from the centre right. If the Conservatives were seriously diminished to third place on Friday morning, that could be a problem for the pound too.
In France, the currency markets are betting on the first-round result not being quite good enough for RN to gain power. With a record number of three-way run-offs, now Macron’s centrist party Ensemble and the left-wing New Popular Front must co-operate if they wish to block the far right Eurosceptics from power. What happens on 7th July will be critical not just for France, but for the future of the European Union too, so expect plenty of volatility in the markets as we approach that.
There is also the US election to consider, albeit still four months away. Few believe that a second presidency for Trump would be politically stable, but would it lead to better governance?
Longer term changes
Elections and referendums can have both short- and long-term effects. Sterling has never recovered from the Brexit referendum in 2016 and is still some 10% weaker. The shock loss of the Tories’ majority in 2017 sent the pound down for a summer, while Boris Johnson’s win in 2019 saw it strengthen sharply, but only for about 24 hours.
When it comes to politics, however, the most innocuous matters can take a currency in a new direction. In February 2020 the appointment of newcomer called Rishi Sunak as chancellor saw the pound gain 2.5% almost overnight. Could there be surprises down the line that influence currencies?
Then there is the effect on interest rates, still the dominant influence on exchange rates. President Biden’s spending and debt forgiveness policies have been blamed for inflation and keeping interest rates high – bad for business but great for the strength of the dollar. If reversed under Trump that could hit the dollar. If a final victory for the RN in France leads to higher spending, or a new Labour government has some secrets up its sleeve, the pound and euro will be vulnerable too.
In this highly volatile state for politics, economics and currencies, why not lock in some certainty and grab today’s strong rate for sterling?
Comentarios