Pound holds firm after UK exit polls signal huge Labour win
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The pound has edged up since Conservative Prime Minister Rishi Sunak called the election in late May, earlier than anticipated.
PHOTO: BLOOMBERG
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LONDON – The pound held firm on July 4 after exit polls suggested Mr Keir Starmer’s Labour Party was set to win a massive majority
Centre-left Labour was on course to capture 410 of the 650 seats in Parliament, giving the party a majority of 170 seats and bringing an end to 14 years of Conservative-led government.
Sterling barely budged after the release of the exit polls, and was last trading around US$1.276, up 0.1 per cent on the day, showing little change on levels seen earlier on. The pound was also broadly unchanged against the euro, which was flat at 84.71 pence.
Against the Singapore dollar, the pound was trading unchanged at $1.72 as at 7.17am Singapore time on July 5.
“The stability that would be provided by such a win would mean investors can cross ‘UK political risk’ off their list of worries for the time being,” said Mr Chris Beauchamp, chief market analyst at IG.
The pound has edged up since Conservative Prime Minister Rishi Sunak called the election in late May,
On a trade-weighted basis, the pound is now back where it was in 2016, at the time of the Brexit vote, reflecting a belief among traders and investors that a period of intense market volatility, driven by political and economic tumult under the Conservatives, may be drawing to a close.
“It’s a breath of fresh air to be running (British) equities in a market where the election is seen as (a) non-event,” said Ms Laura Foll, portfolio manager at Janus Henderson Investors.
“I’m hoping we’re going back to an era where boring is good and politics treads lighter in people’s lives,” she said, adding: “it will be a more gradual lifting (of confidence)”.
Echoing this sense of calm in the run-up to the election, the premium that investors demand for the extra risk of holding gilts rather than top-rated German 10-year bonds has remained stable in 2024 around 160 basis points (bps) – a far cry from the 230 bps seen during mini-budget crisis.
British stocks have hit record highs in 2024, buoyed by a slow-growing but comparatively stable economy and declining inflation.
But the memory of the market chaos triggered by former prime minister Liz Truss’ “mini budget” of September 2022 is still relatively fresh in investors’ minds, and Britain’s stretched finances will give any new government little leeway to increase spending.
So preserving investor trust while tackling numerous economic challenges will be paramount.
“There is a lot of spending that (Labour) have pledged as well and only £20 billion worth of fiscal headroom – give or take – so how those books are going to be balanced is a key question,” Pepperstone senior research analyst Michael Brown said.
Britain has suffered from the highest inflation and some of the highest rates in the developed world in the last couple of years.
British 10-year government bond yields have risen in 2024 to around 4.2 per cent, as investors have sold debt based on their assumption that British interest rates will take longer to fall than many had previously anticipated.
The Bank of England is widely expected to lower interest rates when it meets in August. Investors are likely to quickly look beyond the results of the July 4 election and towards monetary policy, analysts said.
“What’s going to be really interesting is there isn’t actually that much headroom for dramatic change in fiscal policy,” City Index senior markets strategist Fiona Cincotta said.
“So I don’t think there is anything that is going to massively move the market as far as these elections are concerned now until the autumn statement, so the focus is going to shift, probably pretty quickly, back to the Bank of England,” she added. REUTERS
