Select the account you'd like to open


Sterling set to be a political barometer

Last month Theresa May surprised a lot of people by calling for an early election, setting the stage for a third UK  vote in three years, despite previously insisting she had no intention of doing so, as she sought to renegotiate the UK's relationship with the EU in the wake of last summer's Brexit vote.

Whatever your feelings on the prime minister’s motives for doing so, the problem of an election in 2020 was always going to be a stick that the EU was likely to beat her with as the deadline for Article 50 expired in April 2019.

In looking to deal with this by obtaining her own mandate she has shown a welcome pragmatism as well as a far-sightedness in identifying a potential road block and seeking to navigate around it well ahead of time, particularly when you consider the shambolic nature of the main opposition.

This also helps explain the recent rebound in the value of the pound given that the 2020 deadline was always going to be a problem for the UK government, and in seeking to deal with it by aligning the UK electoral cycle with France and Germany’s electoral cycle, she has made the prospect of a transitional deal that much more likely, irrespective of the political noises coming from both sides about the gulf between each sides starting position.

It’s also smart politics given the shambles that is the political opposition, with the Labour party threatening to take the country back to the 1970s, as well as being irrevocably split, and the Liberal Democrats led by a man with all the charisma of a damp rag.

With a working majority of 17 the probability of the prime minister being railroaded by the various factions in her party on both sides was always likely to make the Brexit process incredibly problematic, even without those in opposition who were and still are looking to subvert last summer’s referendum vote.

On current polling estimates, and these are estimates given how inaccurate recent polls have been, the Conservatives look set to increase their majority quite substantially, which in turn is likely to make arriving at a political majority that much easier.  A politician of any political persuasion would have been foolish to ignore those sorts of statistics.

Recent economic data from the first quarter of this year has shown that the UK economy slowed down from the decent numbers seen at the back end of 2016, with an initial GDP estimate of 0.3%, as consumers retrenched after a strong end to the year. Manufacturing also showed some signs of weakening in the first quarter coming in softer for three months in a row before showing a strong rebound in April, hitting a three-year high in the process. 

We saw something similar happen in the first quarter of last year, as well as the previous year, when after a strong end to 2014 and 2015, the economy slowed down in Q1 of the following year, before picking up in Q2, and it looks like the same thing could well be happening again this year, though the impact of higher inflation may act as a curb on some of that.

For now the pound appears to be holding up well, which given the amount of bearish bets surrounding it shouldn’t be too much of a surprise. A lot of the bad news is already priced in, and while a lot of the opening political salvos speak to an unbridgeable gap, talks haven’t even started yet, and aren’t likely to start in earnest for quite some time.

This would suggest that any moves on sterling now are likely to be as result of expectations around the direction of UK economic data, US monetary policy and a narrowing in the polls in favour of the Labour party. Anything else is likely to be noise. 

Heightened market volatility is likely over the election period, this could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Sign up for market update emails