Why the pound is where it is
After months of anticipation of a too-close to call General Election between the Labour party and Conservatives, the result in the end surprised all expectations.
The polls were nearly unanimous in pointing to a fractured parliament, in which a two- or even three-party coalition would be required to form a Government.
In the end, the Conservative party, led by David Cameron, not only remained the largest party, but has achieved an outright majority.
Sterling rose sharply through the night against all other currencies as first exit polls and then actual vote counts indicated that the Tories would be able to form a one-party Government.
More from Enrique Diaz
The reaction in the Pound was a significant one. Sterling rose by 1.5% against the US Dollar (Figure 1) and a massive 2% versus the Euro (Figure 2), buoyed by the dissipation of any fears over protracted coalition negotiations and the possibility the election would have to be repeated.
The rally in the Pound continued in the first half of this week. Sterling remained supported by the re-election of the business-friendly Conservative Party and the growing expectation that Mark Carney would warn markets that they were being too relaxed about the timing of an interest rate hike at the then un-released quarterly inflation report.
The currency soared to a 2015 high versus the Dollar and its strongest position since mid-December.
Figure 1: Intra-day evolution of GBP/USD (08/05/2015). Source: Reuters Date: 08/05/2015 Time: 08.55 GMT
Figure 2: Intra-day evolution of EUR/GBP (08/05/2015). Source: Reuters Date: 08/05/2015 Time: 08.55 GMT
Wednesday morning’s impressive labour data saw Sterling make further gains.
However, these were subsequently wiped out following the Bank of England’s relatively dovish inflation report and the speech from Mark Carney, which caused markets to push back their forecasts for an interest rate hike.
Despite this, the Pound continues to trade at a six month high against Greenback, and a seven year high versus its trade weighted basket of currencies.
Looking further ahead, despite the general stability of a Conservative government, they bring with them the high probability of a referendum on EU membership before 2017. EU exit debates could now influence the long term path of Sterling. However, financial markets rarely look that far into the future, and as this goes to press the Pound remains quite well supported against all major world currencies.