Live Support Centre

Forex News

UK Election Fallout – Have we opened Pandora’s box?

Posted on: 14 June 2017 , by: Darren Sinden , category: Market Review

UK Election Fallout: Have we opened Pandora’s box?

Before I went home on Thursday evening last week, I was asked – “Which way would you want to be in Sterling overnight?”

The colleague that asked the question told me he would regard my answer as a reverse indicator. Not because he didn’t value my opinion, but because he felt that whatever your intuitive reaction was in these situations you should do the exact opposite.  As it turns out he was right.

Perhaps the head also ruled the heart in last Thursday’s UK general election because the strong Tory majority that was forecast by the polls and models (that we highlighted last week) didn’t materialise.

Not only that but the seemingly disorganised Labour party turned out to be anything but. They not only held their own but carried the fight to the Tories across the country.

Theresa May’s party will remain the largest in the next Parliament. However, they will not have sufficient numbers to form a majority government. They are endeavouring to form an alliance with Unionist MPs from Northern Ireland that will allow them to form a minority government. Which under the UK electoral system they are entitled to do, as the party with the highest number of seats.

However, a government in this position risks being undermined on a constant basis simply because they can be outvoted on policy / legislation if the opposition unites against them. Or, if any disaffected members of their party “jump ship“. Under those circumstances they would be said to have lost the confidence of the house of commons.

The last minority Government in the UK was seen in 1974.  It was formed by Labour leader Harold Wilson and lasted for 7 months before a further election was called. The early 1970s were turbulent times of course. But it’s certainly not impossible that we will see similar scenes in 2017/2018.

Brexit fallout

A large US investment bank has already called for the Brexit process to be put on hold. That might seem like a sensible option given that formal negotiations are due to start in a matter of days.

What’s not clear though is how sympathetic the bureaucrats in Brussels would be to the UK’s current situation.  The Brits could well have delivered the strongest possible negotiating position to Brussels – on a silver platter. My suspicion is they will not very sympathetic at all.

As the Director General of the British Chambers of Commerce was quoted as saying "The swift formation of a functioning (UK) government is essential to business confidence”. The same will be true of the markets confidence levels, longer term. Some analysts are already suggesting that this election result will inevitably lead to a softer Brexit and I have sympathy with that view I must say.

Theresa May’s position as both Prime Minister and Conservative party leader are under threat. However, for the sake of stability and the lack of an immediate obvious replacement, she may stay in the short-term. Former Chancellor turned newspaper editor George Osborne described Mrs May’s situation as that of “a dead woman walking” in a TV interview on the weekend.  

Ungallant as that choice of phrase, maybe it is accurate as far as her time in office is concerned.

Where is the pound headed?

Cable (GBPUSD) traded down to $1.26348 on the election results, a level not seen since the 18th of April 2017 and then it was seen on the way up. Because of that fall, the uptrend that had been in place since mid-March was been well and truly broken.

To have any chance of remaining in touch with that trend line we would need to see the UK currency trade up to and remain above $1.2780 – a level that we are still someway short of.

Strong inflation (CPI) data from the UK (up +2.9% in May 2017) released yesterday has weakened sterling further and provided the Bank of England with considerable food for thought ahead of Thursday’s interest rate meeting. This now means that inflation is now almost 50% above the bank’s target of 2.00%. 

Theresa May visited her Majesty the Queen on Friday afternoon to ask for permission to form a government. It’s believed that Mrs May had received tacit assurances of support from the Democratic Ulster Unionists whose 10 seats and votes at Westminster will believed to be allied to her cause. Though as yet we have no details on what this so-called “supply and confidence arrangement” with the DUP will entail. Indeed, the state opening of parliament and the Queen’s speech that accompanies the occasion will likely be delayed, whilst negotiations with the unionist party continue. The suspicion must be that the longer this process takes then the higher the price that the DUP are trying to extract.

It seems fitting to finish with a quote from one of the most famous UK politicians of all time. Winston Churchill who was himself a conservative MP and Prime Minister. He fatefully said: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

 

How do you think markets will react? Trade your opinion with Pepperstone, Australia’s Fastest Growing Forex Broker*.

 

Try Pepperstone Today

Experience forex trading as it should be.

* Based on total share of relationships with current Forex traders.

The information provided here has been produced by third parties and does not reflect the opinion of Pepperstone. The information has been provided without any alteration or verification. Pepperstone does not represent that this material is accurate, current, or complete and it should not be relied upon as such. The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.