Theresa May, British Prime Minister
Political Events Driving FX Markets
Over the last 12 months, markets have been increasingly driven by political events. Just under 12 months on from the Brexit referendum which rocked markets last year, we have seen several key events such as the US Presidential elections and more recently the Austrian, Dutch and French general elections. Traders now turn their attention back to Britain once again as voters take to the polls on June 8th to vote in the general election.
Sterling Surged on Conservative Show of Strength
When current PM Theresa May announced the surprise election in April, Sterling initially surged higher as markets interpreted the move as a show of strength by the conservative party leader to assert a stronger majority in parliament and bolster her position heading into the Brexit negotiations which officially commenced when Article 50 was triggered in March.
How Has Sterling Reacted Over Past Elections?
To gain some insight into how GBP might react to this election, we can, of course, look back at prior election results and the subsequent movement of the exchange rate. Typically, the dynamic that has played out has been that GBP tends to weaken ahead of the election and then gain afterward, in the event of a Conservative win; or weaken ahead of the election and show a muted reaction in the event of a Labour win.
For example, in 2010 when Conservative candidate David Cameron was elected to office, GBPUSD was down around 5% ahead of the election and then recovered by 7.5% in the months following the election. On the other hand, in 2001 when Labour candidate Tony Blair was re-elected to office, GBPUSD was down around 4.5% ahead of the election and simply recovered its losses following the result.
Why Does Sterling React Differently to Labour & Conservatives?
One of the reasons why a Conservative victory tends to see GBP appreciate more is that the Conservative party is viewed as a business-friendly party who will look to lower corporate taxes and lighten regulation, thus increasing investment into the country. On the other hand, Labour is traditionally viewed as less business-friendly, looking to increase corporate taxes and increase regulation, thus providing less encouragement for investment into the country.
The same biases are just as true this time around, with Labour leader Jeremey Corbyn seeking to raise corporate taxes while Conservative leader Theresa May plans to further cut corporate taxes. However, the bigger issue which is affecting Sterling’s skew between the two parties is Brexit.
Read more: https://www.orbex.com/blog/2017/05/uk-elections-threaten-to-rock-sterling-heres-why/