British Prime Minister Rishi Sunak is miles behind in the polls. Yet he called elections last week. However, this unexpected move does not lead to unrest on currency markets. In fact, the pound rose to its highest rate since 2022.
Political uncertainty has had a major impact on the pound's direction over the past decade. The Brexit referendum of June 2016 is the best example of this. When it became known that a narrow majority of the British people were in favor of leaving the European Union, the pound fell by more than 10% within days.
And also during the negotiations on the United Kingdom's exit, the exchange rate sometimes went up or down by percentages at a time. Prime Minister Rishi Sunak's surprising announcement that the House of Commons elections will take place on July 4 seemed to be the prelude to a new course change. But instead, things remain remarkably quiet on the currency front.
The outcome seems to have already been determined
An important reason why the pound hardly moves is because the outcome has already been determined. Opposition Labor party has a lead of no less than 20 points in the polls. Many Britons blame the ruling Conservative Party for the high inflation in 2022 and 2023. Food and electricity prices have risen by more than a quarter in recent years. Although inflation is now clearly falling and the government has increased its budget with energy subsidies, this is hardly reflected in the polls. Currency traders have therefore been able to position themselves for a Labor election victory for months. The fact that the polls are taking place a little earlier than expected does not change that.
All eyes on the Bank of England
In addition, the Bank of England's (BoE) policy currently has much more influence on the exchange rate of the pound than the upcoming elections. Inflation in the British services sector in April was much higher than economists had expected. For the central bank, it is still too early to tinker with the policy interest rate. The European Central Bank has been preparing for an interest rate cut in June for some time now. Due to the recent inflation rate, there is a good chance that the BoE will then take a step back. A growing interest rate differential works to the pound's advantage. The interest rate tailwind also explains why the currency has already risen by 3% against the euro since November. Last week the pound even reached its highest price since the summer of 2022.
Smart time to hedge risks
Of course, it is by no means certain that the calm on currency markets will last until the elections. For example, due to some missteps by Theresa May, the Conservative Party unexpectedly lost its absolute majority in the 2017 elections. It will therefore be exciting in the coming weeks to see with which party program the Labor Party will start the election race. However, for all companies doing business in the United Kingdom, the currency calm offers an excellent opportunity for the time being to cover exchange rate differences at an attractive price. Because experience shows that this protection becomes a lot more expensive when the tension around the pound starts to rise again.
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