After months of speculation, the wait to find when the next UK general election will take place is finally over. Rishi Sunak’s announcement stunned the country, having kept his plan for a 4 July poll a closely guarded secret until the last minute. In a prepared statement, the prime minister said a general election would decide Britain’s path after several years of upheaval, as he bids to win a fifth term in office for the Conservatives – but what does the surprise move mean for the pound and your business?
Election-induced volatility
Would an autumn vote have given the Tories a better chance of overturning Labour’s commanding 20 points lead in the opinion polls? Instead, the PM gambled that cooling inflation and a recovering economy will generate the momentum his party needs to close the cavernous gap. These surveys of public opinion will help politicians and the public gauge if Rishi Sunak’s decision will pay off – and in doing so they will dictate investor sentiment towards the pound.
If recent elections are anything to go by, we will see pound volatility intensify as opinion polls hit the headlines during the next few weeks of campaigning. Currencies like political certainty, and the pound is no exception. An election creates unknown variables and moving parts, which was underscored by the immediate impact of the PM’s shock announcement on the pound: the UK’s currency’s two and three month implied volatility rose over 20 basis points, the most since mid-April.
This turbulent outlook is set to compound an already volatile period for the pound, which has been pulled back and forth so far in 2024 amid sticky inflation and interest rate cut speculation. Based on data from the last six elections, we could see this year’s high low range potentially double.
If we look at the two-month range straddling these six polls, we can see just how big the swing between the high and low points can be for the pound during an election and beyond:
GBPUSD
- Average = 6.32% – in today’s market that’s circa 8 cents
- Max (2015) = 8.95% – in today’s market that’s circa 11 cents
GBPEUR
- Average = 5.29% – in today’s market that’s circa 6 cents
- Max (2010) = 7.72% – in today’s market that’s circa 9 cents
In these six weeks between the PM announcing the election and voters heading to the polls, businesses that fail to hedge their FX risk will expose their costings to heightened market volatility.
How could the election result impact the pound?
As the PM and his political rivals embarked on the election campaign trail, one thing was certain: it will prompt high levels of volatility for the pound. What we can’t be sure of is the outcome of the vote – so how could the different permutations potentially impact the UK currency?
| Labour victory If the opinion polls are accurate and Kier Starmer’s Labour party stroll into number 10, removing the embattled Conservative government from power, the pound may strengthen – breaking the trend for markets to favour political continuity over change. The opposition party’s shift to a more pro-business, centre-ground stance has convinced 44% of professional investors that a landslide Labour victory would be best for UK markets; while just 25% of investors feel a clear win for the Conservatives – traditionally the party of business and finance – would be the best result. |
| Hung parliament If the Conservatives manage to erode Labour’s lead enough to prevent them from achieving a majority win, we could be left with a hung parliament – potentially the most disruptive result for the pound. A Labour-led coalition government appears much more likely than a Conservative-led one, but either outcome could sap investor sentiment towards the pound. |
| Conservative victory There’s one factor during an election that businesses with an international footprint must be aware of: opinion polls are notoriously fallible. Therefore, despite their current double-digit percentage points lead in the polls, a Labour victory is not guaranteed just yet. For instance, in the April 1992 UK election, a consistent Labour lead in polls was unexpectedly overturned by the Conservatives who won a fourth consecutive victory. If history repeats itself, this unforeseen result could spark market volatility. |
Plan for every eventuality
Don’t rely on opinion polls to inform your business’s FX risk management strategy during this volatile period. Take Brexit for example: of the 168 polls carried out after the EU referendum wording was decided in September 2015, fewer than a third (55 in all) predicted a leave vote. The picture doesn’t become any clearer in the US, where in the weeks leading up to the 2016 election, polls across the country predicted an easy sweep for Democratic nominee Hillary Clinton, only for Donald Trump to triumph.
Even if they end up being accurate, it’s impossible to say for certain how markets will react to an election result. While this uncertainty defines the political landscape during an election campaign, your business doesn’t have to be hamstrung by its impact on currency markets. Reinforce your business with certainty amid the influx of polls and subsequent market movements by working in partnership with Lumon.
We can help you achieve a proactive and systematic approach to FX risk management that considers what impact an extreme market swing could have on your business. With this in mind, we can help you replace emotion-led choices with informed decisions by leveraging hedging solutions that safeguard your international payments against FX risk. Empowered by this proactive approach to risk management, you can secure your costings during the volatile election period – and beyond.
