What does the 2024 election mean for the pound?

What does the snap general election mean for the pound?

After all the election rumours, we finally got the truth on a sodden May afternoon.

Prime Minster Rishi Sunak has called a snap election for Thursday 4^th July. The timing raised a few eyebrows, particularly as many thought Sunak would wait until Autumn in the hope recent tax cuts would be felt in the pockets of more voters. However, he and Jeremy Hunt reportedly concluded that they had no room for further cuts and that this was as good a time as any to go to the country.

The business community will now spend a slightly uncomfortable six weeks waiting for what comes next. Clarity is unquestionably good for financial planning, so what does the upcoming election mean for the pound, as well as your bottom line? We take a look in this week’s blog.

Recent history

Nobody needs reminding that the UK has had a turbulent time with elections over the past decade. The most drastic volatility came with the Brexit vote, but since that was a referendum on a single issue, we’ll leave it to the side for the moment.

The 2015 and 2019 elections both brought relatively comfortable majorities for the incumbent Conservative party. David Cameron and Boris Johnson’s wins helped the pound strengthen, in large part due to the certainty they provided. 2015 brought the end of coalition government, while Johnson’s landslide victory was greeted well on the hopes it would bring an end to the Brexit impasse once and for all.

2017 was a much more complicated affair. Theresa May’s Tories lost their majority, leading to a hung parliament and months of wrangling. The pound fell by 2% against the euro and the US dollar on the day after the election, with falls of up to 5% in the weeks that followed.

What will happen this time?

Rishi Sunak’s timing has been interpreted as a massive gamble, and few are confident it will pay off. Labour has an average lead of around 20 points in the polls, the kind of deficit that is not only likely to prove insurmountable, but that could lead to catastrophe for the Tories depending on how the votes fall.

Keir Starmer could soon become the first Labour Prime Minster in 14 years. That might seem a big change, but it’s seemed the most likely outcome for a couple of years. Businesses have had time to take it all in, as well as predict what that might mean for daily operations.

If he is elected, Starmer’s in-tray will be bulging. Massive issues like public services, immigration and ironing out details from Brexit trade negotiations mean that the future Prime Minister will have to balance policy with fiscal consolidation. Promising too much funding could also scare investors away from the pound, which has led Labour to take a risk-averse approach.

Where will the pound go?

It’s hard to make any sort of predictions from a currency perspective, given the inherent volatility of markets. However, traditional economic opinion suggests that the pound will see a short-term bump as political uncertainty dissipates and the country takes aim at the not insignificant challenges it faces. Elections can often be a catalyst for currency volatility, however, so don’t be surprised if the pound rises and falls at short notice during the campaign.

Projecting the pound’s trajectory into the longer term in altogether more difficult. We would never advise doing so, given the complex cocktail of factors that dictate relative value of currency pairings. Government policy will dictate much of the economic recovery, but there are simply too many variables to accurately predict where the pound will trade.

Elections underscore the value that Smart Currency Business provides. We’ve seen our fair share of polls, and the one piece of advice we would give is to never assume stability. Such febrile conditions are a magnet to price swings, and for businesses up and down the UK, the value of having predictable cashflows, protected margins and robust gross profit is immense.

To make sure your upcoming transactions are protected against the risks of sudden market movements, call your Business Trader on 020 7898 0500 to discuss a forward contract; alternatively, if you’re new, please register with Smart Currency Business today.