June 8: D-Day for the British Pound

Next week's UK election promises to be quite exciting. That is a line through Prime Minister Theresa May's bill and through the British pound.

The British people will go to the polls for the second time in a year next Thursday. On June 23, 2016, the Brexit referendum voted on EU membership. A year earlier, calling that referendum still seemed to be a masterstroke by the then British Prime Minister David Cameron.

Cameron was confident that the majority of Britons would prefer to keep its affiliation with the EU. His plan was to create greater support for continuing his political course. Instead, the Brexit camp won a narrow majority, after which Cameron resigned. It seems that his successor Theresa May has now also made a serious miscalculation.

Big miscalculation
Prime Minister May has called new elections for the lower house of parliament in mid-April. With this she wanted to make good use of her growing popularity, which she owes to her hard line in the negotiations with the European Union. Her Conservative Party was still a good profit in the polls a month and a half ago.

With a larger majority in the British Parliament, May would be less dependent on parliamentarians who bet on a hard Brexit. Moreover, she does not have to worry that after the deadline of the negotiations with the EU there will be elections again, in which she may be severely punished for delays or concessions.

Panic after poll
It seems that May has shot herself in the foot with the snap election. On Tuesday evening, The Times published the results of a YouGov poll, which showed May's Conservative Party could lose as many as 20 seats. Labour, the main opponent of the Conservatives, would just get 30 more.

The Times immediately noted that the poll has a fairly large margin of error. Still, the reaction in currency markets was felt harsh. Within hours, the pound fell by more than half a percent to its lowest level since the elections were called. The blow seems just the beginning of the "pound pain".

Elections with major consequences
The British currency has rebounded somewhat after the election. Traders thus anticipated the greater scope May would have to conduct her own policy. The exchange rate has now returned to its mid-April level, with the market expecting the Conservative Party to at least retain its majority. If that image has to be adjusted, the consequences are serious.

The blow hits hardest when Labor gains a majority. The party mainly has big plans to reform the British economy. There is no clear strategy for the Brexit negotiations and that will create uncertainty in currency markets. However, the chances of a Labor victory are quite slim. It is more likely that May will not get an absolute majority and will have to look for another party to keep the majority in parliament. These negotiations in turn fuel political uncertainty.

For the time being, the foreign exchange markets still seem very likely to expect a victory from the Conservative Party, but that chance is slowly declining according to the polls. In almost every other scenario, the pound will come under pressure. Investors can therefore choose a position for a decline in the British currency, while entrepreneurs should look for opportunities to hedge their future earnings in pounds.

Lawrence Martins

Laurens Maartens is a currency expert at the Dutch Payment and Exchange Company (NBWM). Maartens analyzes current currency developments and also provides lectures and training in the field of currency management.

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