Can the U.K. vote itself out of financial trouble – FX industry view
FX industry expert Meir Velenski analyses the initial reaction to cable (£ versus $) was a sell off in sterling in the immediate period after Theresa May’s announcement of a snap election and what may ensue within Britain’s capital markets once the British electorate has made its choice
Now that the U.K. is heading for the polling stations again in less then 2 years ( May 7 2015) can the U.K. Actually vote it’s way out of the Financial difficulties post Brexit. Is this possible?
The background to this snap call to the polls is as a direct result of all the smaller and major opposition parties threatening the government and blocking the exit from the EU. Opportunist opposition parties want to wreck the party!
Theresa May has thrown the gauntlet down and is gambling on a surge in her popularity with dissent amongst Labour voters. If Theresa May wins a major majority then the way is clear for her to manage and direct the U.K. and it’s economy clear of all financial ills post Brexit.
What about the FX markets
The initial reaction to cable (£ versus $) was a sell off in sterling. In fact there was a sell off in sterling against all currencies initially . Capital markets marked the prices lower. This reaction was natural as it reflects uncertainty in financial markets and therefore traders and institutions level their books to reduce risk.
However, after a very quick gap downwards , the analysts realized that in fact based on the potential victory sterling will fair well and bought into the currency, therefore reversing the loss.
Going forward, it’s unlikely drawing closer to the election that sterling will strengthen any further and this maybe just a flash in the pan as the Brexit effect has not gone away.
The volatility has increased in the currency and that shows a hot temperament to the pound.
Interestingly global markets did not over react to the news but the FTSE has dropped over 250 points since the announcement and stayed down as opposed to the pound which rebounded.
The equity market is pricing in the uncertainty and international and local companies yes holding off spending or investing until the election results are over.
Billions were wiped off the value of U.K. Companies on the announcement . This is only temporary.
Based on a conservative victory then there will be a sharp rebound.
So what exactly will the benefit be to the U.K. Economy
Well this could be vey interesting . If the Tory party was to win by a significant majority, this would be a vote of confidence in the economic management of the Country. In addition it would give the green light for Theresa May to go all out on tough negotiations with the EU and its exit.
You need to remember that the U.K. Pays billions a year to the EU and that is an immediate saving excluding all the other cross border costs and savings. The U.K. Will then have a strong government with the public backing and will be able to establish good quality contracts with EU and non- EU countries.
In addition foreign money and investments will pour into the U.K. as political stability will return which will give confidence to overseas investors.
If the Brexit talks show signs of success then this will give an extra adrenaline push further both to the economy and the pound.
The U.K. Will be post election a solid place to invest and a country that will attract heavy investment . Presently for example the U.K. is No.2 outside of the US in terms of R&D technology spend and investment . This will not change.
In addition the banking sector will benefit and enjoy a surge in business domestically and internationally.
In summary, this election is the opportunity of the decade to start a fresh with new horizons and establishing new economic goals and achievements.
All well and good as long as the polls are right? Let’s wait and see.