Pound sterling exchange rate outlook depends on UK election result

For much of 2014, the direction taken by the pound was largely driven by Bank of England (BoE) interest rate hike projections, with the prospect of borrowing costs being increased towards the end of the year lending it support against peers like the US dollar and euro.

However, after global deflationary pressures mounted and UK economic data began to fall short of the mark, BoE interest rate hike projections were pushed back and the pound steadily retraced its steps.

In early 2015, the pound was able to surge to a fresh seven-year high of 1.42 against the euro as a result of the European Central Bank’s (ECB) introduction of quantitative easing. But with the most hotly contested UK General Election in living memory scheduled for May, it just couldn’t maintain its advantage.

In the week ending 10 March, the pound sterling to euro (GBP/EUR) exchange rate was trending in the region of 1.37 as a result of Greek bailout concerns and encouraging UK services data while the pound sterling to US dollar (GBP/USD) exchange rate bounced up towards technical resistance of 1.50 in response to poor US jobs data and the belief the Fed will refrain from adjusting borrowing costs this summer.

But many industry experts are expecting Sterling to experience a turbulent time in the weeks ahead.

As it stands, the race for Number 10 has no clear frontrunner, and the prospect of a hung parliament is looking increasingly likely.

The political turbulence such a result would yield is likely to keep the pound under downward pressure and prevent the currency from posting any notable gains, even if UK ecostats keep impressing.

According to industry expert Neil Woodford, this election is the most important he’s witnessed. He commented, ‘Can you expect Scotland will be part of the UK if the SNP is supporting a minority Labour administration? What will happen to Britain’s membership of the Eurozone? These are big uncertainties that won’t become that much clearer until after the election. I expect we will have quite a lot of instability after the election […] These are interesting times but uncertain times and you have to be wary as an investor in the market with that backdrop.’

While the long-term prospects of GBP to USD and GBP to EUR exchange rates will be dependent on the way the election progresses, UK data will continue to have a short-term impact next week.

UK reports with the most potential to cause pound sterling exchange rate movement include the nation’s inflation data (due out on Tuesday) and the latest employment figures (scheduled for publication on Friday).

If the pace of UK consumer price growth accelerates or if UK average earnings increase markedly, we could see the pound rally across the board. Both events would support the case in favour of the Bank of England (BoE) increasing interest rates at either the end of this year or the beginning of next. 

Contributed by TorFX

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