Hung drawn and quartered Pound

12 June, 2017

Tom Arnold

Recent weeks have been overshadowed by the UK election and as a result, the Pound had lost strength to uncertainty and then stabilised as investors waited with baited breath to see what the vote would give us. From a Pound perspective, there was significant optimism as polls consistently told us that the Conservatives were going to not only win but also secure the majority they wanted to give them full control of parliament.

The vote happened and then the exit polls came through, and immediate shock descended. The Conservatives had not only failed to gain a significant majority but had failed to even get a majority – Theresa may’s calling of the election to take advantage of a feeble Labour party, had massively backfired and the youth who had failed to turn up for the Brexit referendum, had come out in force and voted for Labour’s well-targeted manifesto.

The Pound was hit immediately and dropped 2% against its major counterparties. The next morning this drop seemed likely to continue, but quick and decisive action from the Prime Minister to announce she was going to form a government and was doing a deal with the DUP to get a majority of key votes, gave some stability and stopped the rot – there was even some gains remade fo the original losses.

However, the weekend has now passed, with many newspapers talking Tory revolts, leadership challenges, Labour’s desire to form a coalition government, and as a result a soon to be ousted Prime Minister, and therefore we are back to a weakening Pound and uncertainty in the markets.

To add to the mix, the week ahead is a busy one with many key data releases, including inflation numbers from around the globe and a raft of key UK stats, topped off by the Bank of England monthly policy statement on Thursday.

UK Inflation Report Hearings

UK CPI Inflation
UK RPI Inflation
European ZEW Survey
German ZEW Survey

German CPI Inflation
UK Unemployment Rate
UK Average Earnings
European Industrial Production
US Retail Sales
US CPI Inflation
US Federal Reserve Interest Rate Decision and Monthly Policy Statement

UK Retail Sales
European Trade Balance
UK Bank of England Interest Rate Decision and Monthly Policy Statement
US Industrial Production

European CPI Inflation
UK Bank of England Quarterly Bulletin

A hung parliament was always going to be the worst-case scenario for the currency markets because the real killer for any currency is uncertainty. Until the Queen’s speech and the subsequent ratification vote, which is set for the 27th of June, we can expect a pretty bumpy ride. The vote itself could be devastating – if Theresa May were to lose the vote, then she would be gone, and the turmoil of a leadership challenge, a possible new election and Jeremy Corbyn trying to unify all of the other parties in a coalition, would undoubtedly take all support away from Sterling. If she scrapes through, then a bit of certainty will be brought back, but only as long as she keeps her job, which is far from a foregone conclusion. It could even be argued that the certainty of having got through a Queen’s speech vote would provide the perfect timing for a leadership challenge.

If you have an upcoming currency requirement and Sterling in hand, then there is no silver lining. The weeks ahead will not be any fun, and you are probably best off to remove the risk from your transaction by securing your rate either on a spot transaction or, if your requirement is come way off, via a forward contract. Get in touch with your CI account manager today to discuss your options.