Election Volatility About to Finally Hit the British Pound

With the General Election now less than a week away one would expect volatility in the FX markets to finally start to be felt.

Volatility has however not been reflected by currency market moves in recent weeks; the British pound has actually appeared to thrive with good gains against the US dollar being recorded in particular.

This confirms to us just how difficult it will be for market watchers to anticipate GBP's moves over the election period.

However, those with foreign exchange requirements should be aware that in all likelihood there will be volatility immediately following the election and markets may start to cut back on their exposure to sterling in coming days.

A potential 3% move either way for sterling should be accounted for meaning a lot is at stake for those with immediate currency requirements. Speaking to your FX provider about hedging your exposure to profit on moves in your favour is highly recommended.

Chris Towner, managing director of FX advisory services at foreign currency specialists HiFX, said:

“Stepping back from all the polls and just looking at the impact of some simple outcomes on sterling, the Conservatives are seen as the party that is best at handling the economy, controlling the deficit and therefore giving stability to sterling. On the other hand, Labour are seen as the party that has the potential to spend more and increase the budget deficit and this is expected to weigh on the pound.

“Overall we would expect the currency markets only to become volatile once the results start coming out and expect a move in sterling of up to 3% either way. The other issue is how quickly it will take for a Government to be formed and whether this would be a majority or minority Government. Needless to say, a majority Government adds stability to sterling.

“All in all, a Conservative led Government within a coalition could push sterling against the US dollar and the euro up around 2%, whereas a Labour-led result would knock a couple of percentage points off the value of sterling.

“Although we expect volatility to rise over the election period, once all has settled and the Government has been formed, then the FX market is expected to revert quickly to focussing on the economy.”

Dollar Under Pressure

The key theme at the present time on the currency markets relates to the US dollar sell-off.

This has allowed the pound sterling to make solid gains as of late ensuring that any post-election slump will likely be negated.

EURUSD continues to nudge higher and is now above 1.1150 on an extension of the EUR bull move from the past few days.

“While we have seen no specific trigger from hard data this morning, we think these moves continue to reflect the reassessment of monetary policy in the US, following yesterday’s dismal GDP figures and the FOMC that provided little material indication that the Fed stands ready to hike anytime soon,” says Cristian Maggio from TD Securities.

Against this backdrop, the dollar is giving back some of its strength from the previous months, but this is less visible against other currencies than the euro (at the time of writing, DXY is down 1.2% in two days).