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How Could the July 2024 UK Election Impact the Pound?

May 25, 2024June 13th, 2024No Comments

The upcoming general election in the UK is a significant event not just for its political landscape but also for its economic repercussions. One of the key indicators of economic sentiment and stability is the value of the British pound (GBP). As the election date approaches, the pound’s performance will likely reflect market perceptions of political stability, economic policies, and the overall direction the UK might take. Currently, the market is intensely focused on inflation, and how each party’s policies might impact inflationary pressures will be a crucial factor in the pound’s movement.

Historical Context and Current Political Landscape

Political events have a substantial impact on the pound. Sterling experienced a dramatic decline following the Brexit referendum, faced uncertainty during the partygate scandal, and saw volatility after Liz Truss’s 2021 mini-budget. Since Rishi Sunak took over as Prime Minister, the political landscape has stabilised somewhat, but the upcoming general election introduces new potential for volatility.

The UK general election is scheduled for Thursday, 4 July 2024, following Sunak’s surprise decision to call a snap election. Before the election, Parliament was prorogued on Friday, 24 May, and will be dissolved on Thursday, 30 May. During this period, neither House nor their committees will meet until after the election.

Members of the House of Commons will cease to be Members of Parliament once dissolution happens, while Members of the House of Lords, who are appointed, retain their positions. The new Parliament will first meet on Tuesday, 9 July, when members begin to take the oath, and the House of Commons will elect a Speaker. The Royal Approbation ceremony for the Speaker-elect will also take place in the House of Lords chamber. The State Opening of Parliament is expected to take place on 17 July.

How the Election Could Impact the Pound

Political uncertainty generally harms the pound, leading to potential volatility and weakness in GBP ahead of and during the election, especially if the gap between the two main parties narrows. The market’s primary concern right now is inflation. Central banks worldwide, including the Bank of England, are focused on controlling inflation, which has significant implications for interest rates and economic stability. The market will scrutinise each party’s policies to determine whether they are likely to be inflationary or deflationary.

Inflationary Policies:

Increased Public Spending: Policies involving significant increases in public spending, such as large infrastructure projects or expanded social programs, could be seen as inflationary. If markets perceive a party’s platform as likely to increase inflation, this could weaken the pound as investors anticipate higher future interest rates to combat inflation.

Tax Cuts: While tax cuts can stimulate economic activity, they may also be inflationary if they significantly boost demand. Markets will weigh the potential for short-term economic growth against long-term inflation risks.

Deflationary Policies:

Tax Increases: Parties proposing austerity measures, including cuts to public spending or increases in taxes to reduce deficits, might be viewed as deflationary. These measures can strengthen the pound by signaling fiscal discipline and reducing inflationary pressures.

Monatary Policy: Any indication that a party supports tight monetary policies to control inflation will likely be positive for the GBP, as it suggests a commitment to maintaining economic stability.

Investor Sentiment and Market Reactions

The announcement of the snap election on 4 July 2024 has already influenced market sentiment. Prime Minister Sunak’s decision pushed the pound slightly higher and stock futures a touch lower, as markets had anticipated an election but expected it later in the year. Investors now focus on the outlook for interest rates and the broader economy as the dominant forces driving the pound, stocks, and bonds.

Economic Indicators to Watch

Investors will closely monitor several economic indicators leading up to and following the election however some key indicators would be:

  • Treasury Yields: Fluctuations in treasury yields can signal changes in investor confidence and expectations about future interest rates, impacting the pound.
  • Manufacturing PMI: The Purchasing Managers’ Index (PMI) for manufacturing is a leading indicator that provides insights into the economic health of the manufacturing sector. Higher readings generally suggest economic expansion and are positive for the currency.
  • Core CPI Inflation: Core Consumer Price Index (CPI) inflation, which excludes volatile food and energy prices, is a critical measure of underlying inflation trends. Higher core CPI could prompt the Bank of England to adjust interest rates, influencing the pound.
  • COT Reports: The Commitment of Traders (COT) reports provide data on the positioning of traders in the futures markets, offering insights into market sentiment and potential future movements in the pound.

The upcoming UK general election is a critical event for the British pound, with potential impacts ranging from short-term volatility to longer-term economic shifts. Market participants will be keenly observing poll results, party manifestos, and economic indicators to gauge the likely outcomes and their implications for the GBP. The market’s focus on inflation means that policies perceived as either inflationary or deflationary will be crucial in determining the pound’s movement.

The article above is for informational purposes only and should not be considered investment advice. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The information provided is based on current market conditions and political events, which are subject to change and may impact financial markets. The author and publisher are not responsible for any losses or damages that may result from the use of this information.

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