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How Will The General Election Affect The Pound?

Sterling has been on a rollercoaster ride since the Brexit vote, how will Thursday's general election impact its fortunes?

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Sterling has been on a rollercoaster ride since the Brexit vote, how will Thursday's general election impact its fortunes?

Opinions

How Will The General Election Affect The Pound?

Sterling has been on a rollercoaster ride since the Brexit vote, how will Thursday's general election impact its fortunes?

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As the clock ticks down to the election, all eyes are on the polls. But for businesses trading internationally, the pound should also be a major focus.

The currency market will undoubtedly be affected by the election whatever the result, and could have serious knock-on effects for any British business with ties to overseas markets.

Here’s an overview of the potential impact, and how you can protect your business in advance.

The outlook for the pound

The impact on sterling depends on the outcome of the vote, which now seems less certain than when Theresa May called the election in April. Back then, the markets were confident in a significant Tory majority.

This buoyed the pound as it was felt to reinforce May’s position, giving her a clear mandate as Prime Minister and a strong hand in upcoming Brexit negotiations.

But polls have varied dramatically over the past few weeks, leaving a Conservative landslide far from a foregone conclusion. Little has gone to plan, and the election that once seemed straightforward is now anything but, so we should continue to expect the unexpected.

Political analysts see a 50-seat majority as a safe margin for Theresa May, if she wants to maintain control of her party through Brexit. A majority of more than 50 would boost the pound and leave markets buoyant, but in the last month, Labour has gained nearly 10% in the polls.

As a result, markets have grown worried about the likelihood of a definitive result. The pound recently wobbled after a YouGov poll predicted a hung parliament, and it’s been suggested that if the Conservatives fail to get a majority, there could be more of this to come.

Geopolitical context matters more than ever for sterling, and with Brexit negotiations looming, investors are seeking clear intentions from Britain. An uncertain election result would offer just the opposite, and is likely to weaken the pound.

Looking ahead, many believe that a Conservative win would bring some certainty to the British economy – for Brexit negotiations in particular – and could bolster the pound to $1.31 and €1.18.

A Labour minority government or coalition would likely support the pound, but a Labour win may have an opposite, more dramatic, effect on sterling. It truly is unchartered territory at this point.

Looking beyond the election

Of course, it’s not just the General Election that businesses should be watching. For many investors, Brexit is a much bigger issue facing the pound.

Uncertainty about how Brexit will unfold and affect the British economy in the longer term is leading many investors to avoid the question altogether by investing elsewhere. This could have protracted effects on the value of the pound, as investors look for ‘safer’ currencies.

But it’s not just internal politics that will affect the value of sterling. External factors are important too, particularly as the UK may be heading for increasingly antagonistic relationships with both the US and the eurozone.

In the US, President Trump has shown a willingness to execute policy with little regard for historic partnerships and agreements; in Europe, France and the Netherlands recently elected pro-EU leaders. With Germany heading for an election, a win for Merkel would solidify alliances within continental Europe and leave the UK at a disadvantage during Brexit negotiations.

The impact on British SMEs

Before the Brexit vote, the pound was trading at over €1.30 – since then, it’s declined almost 13%. Should a Labour victory upset the status quo, as the EU referendum did last year, its effect on the pound could be substantive.

It pays to be aware of the potential fallout for your business. If you import from Europe, a weaker pound would mean higher costs, and could potentially eat into your bottom line. But if you’re selling to the continent, a weak pound can actually be good news.

As the euro strengthens against sterling, your European customers will have greater purchasing power and be able to buy more of your goods priced in pounds, which is good news if you are a net exporter.

Meanwhile, those trading further afield should consider the impact that the pound to dollar exchange rate could have on their business, as well as keeping an eye on how sterling moves against other major currencies.

If you trade overseas but aren’t sure how you could be affected, it’s best to consult an expert who can take a look at your business and recommend a currency strategy that’s tailored to your needs.

Protecting your business

While a clear Tory majority may bolster the pound slightly, most other scenarios – including a hung parliament, Labour win, or modest Tory majority – are likely to see the pound decline over the long term, if not immediately.

If you’re worried about how high or low sterling may go, it’s worth considering a currency strategy that can protect your business from unnecessary risk.

For example, it’s possible to lock in an exchange rate ahead of the election using a forward contract. This would protect you from future moves in sterling, and give your business greater ability to plan for the year ahead.

Alternatively, you could use a target rate tool called a limit order, which only transfers your funds when your desired exchange rate is reached. If you can wait for your payment, this can be a great option – but it’s always worth remembering that the market can move against you as well as in your favour, so it’s worth having a plan B.

If you don’t work with one already, a currency expert can help you develop the right plan for your business. A strong currency strategy can save you from unnecessary losses due to a volatile market, so it’s well worth exploring your options and getting the right advice.

William Shepherd is head of treasury at OFX, an international payments company.

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How Will The General Election Affect The Pound?

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