Post-election surge lifts Sterling to 2-year high

With the conclusion of the UK election last week and the ongoing French and American elections, we’ve examined the impact elections, or politics in general, can have on currencies. This comes at a time when the Pound Index is at its highest since 2022, marking a two-year high for Sterling in general.

The UK Election and Sterling's Stability

The general rule with elections, as with any other factor influencing currency prices, is straightforward: the more anticipated the result, the less dramatic the market reaction. This was evident in last week's UK election, where Labour's majority brought an end to a single party's 14-year tenure with a notably muted response from the markets.

Labour had been leading by 20 points in nearly every reputable poll since October 2022, coinciding with then-Prime Minister Liz Truss announcing a largely unfunded round of tax cuts amidst market anxiety over the UK's post-COVID debt mountain. This predictability was key in the limited market reaction.

The European Election Dynamics

European elections take a different tone themselves, with June's European Parliament elections returning a very strong result for Eurosceptic parties, jolting the Euro's value as traders grew anxious about the common currencies future.

This initial Euro weakness was further exacerbated by the drama of the French elections. Marine Le Pen's strong turnout in the first round triggered additional softening of the Euro. Market hesitancy regarding Le Pen is twofold: her Euroscepticism poses a threat to the stability of the Eurozone, and her economically leftist, largely unfunded policies have already led to higher risk premiums on French bonds to guard against a potential Le Pen victory.

However, in the second round, a broad coalition of left-wing parties blocked a Le Pen majority, allowing the Euro to recover. Markets generally react positively to coalition governments due to their relative inefficacy and slow policy production, which tend to maintain the status quo.

The US Elections and Dollar Resilience 

When it comes to US elections, the Dollar usually remains resilient. The binary choice between two candidates means that much of the potential market impact is priced in well before Election Day. There's a commonly held belief that Republicans are better for the equities market, although historical data challenges this notion. For instance, the market downturns in 2008 and 1929 occurred under Republican presidencies, highlighting that this assumption is often subject to debate.

Sterling's strength: A prime opportunity for currency buyers 

The Pound Index is at its highest since 2022, marking a two-year high for Sterling. This shows strong market confidence in the UK's economic stability and political direction. For those looking to buy currency, now is a great time to take advantage of Sterling's strength. A strong Pound means you get more value when exchanging for other currencies, making it a smart move for international investments or travel plans. Locking in these favourable rates now can lead to significant savings, so it's a good time to act while the market is in your favour.

In summary

In summary, elections do impact currency markets, but the effects are often lessened by how predictable the outcomes are and the specific political and economic context. As we follow the current political events in France and the US, and look back at the recent UK election, it's important to understand these factors and how they can affect currency movements.

With Sterling at its highest since 2022, the link between political stability and market confidence is clear. At Caxton, we're always on the lookout, ready to navigate these changes with careful attention.