UK General Election Shocks Markets

Sterling took centre stage this week as the results of a historically uncertain General Election proved surprisingly decisive. In a repeat of the 1992 election, where expectations were for a Labour leader to seize power from an incumbent Conservative, the British electorate once again embraced the Conservatives.

There were several themes which caused shockwaves to run through Westminster as the night unfolded. Early exit polls predicted the Lib-Dems would be reduced to just ten seats from over fifty; they failed to reach even that mark, ending on eight.

Not to be out done, Labour challenged for the biggest underperformance, walking away with just 230 seats after suffering an annihilation in Scotland. It was a historically good night for the Scottish National Party, who won 56 of 59 Scottish seats. The biggest smile of the night however will belong to David Cameron. Despite the fact the bookmakers had a Conservative majority as the fifth most likely outcome at 15/1, voters turned out to support the incumbent. The Conservatives will be returning to Number 10 with a majority mandate of 331 seats out of a possible 650.

With the political uncertainty that plagued the British Pound in recent months comfortably in the rear-view mirror the unit has taken an offensive position in currency markets. GBP had been under pressure all of this week only to enjoy a relief rally of 5 big-figures against both Greenback and Euro in a 24-hour period on election day/night. Looking forward, the attention of financial markets will return to the monetary policy and the prospect of interest rate hikes. This suggests that GBERUR could see further gains back towards 8-year highs touched back in early march near 1.40. The outlook for GBPUSD is less certain however as both the Federal Reserve and Bank of England (BoE) ponder tighter monetary policy. Until this week most banks were calling for GBPUSD in the low 1.4’s or high 1.3’s by 2016. The decisive nature of the election in the UK is likely to temper that outlook.

Friday afternoon saw the US Non-Farm Payrolls number published at +233k. This normally crucial number was largely ignored due to the political events in the UK. The number was just behind expectation, and significantly better than last month’s big miss. It is too early to say whether this means the US recovery is back on track, so analysts will still be watching for other clues.

The roller coaster for Sterling isn’t likely to end this week with the conclusion of the General Election. Next week has a raft of British economic data events in store, including the heavy hitting BoE Quarterly Inflation Report (QIR).

The BoE kicks off the week with is regularly scheduled monetary policy announcement. Given that the QIR is on Wednesday, no policy change is expected. As such there’s unlikely to be an accompanying rate statement; the BoE tends not to publish a statement if no change in policy occurs. As such Monday is likely to be a bit of a non-event.

It’s a mystery as to why the BoE hasn’t combined its monetary policy announcement with next week’s QIR, it all seems a bit redundant. In any event,Wednesday will see Governor Mark Carney will roll out the BoE’s updated economic forecasts, offer fresh policy guidance, and take questions from journalists. This is likely to see elevated rate volatility in Sterling as markets react quickly to digest any valuable information that results. In particular financial markets will be sensitive Carney’s comments on a possible rebound in inflation now that cheaper global energy prices have had time to filter their way to the end consumer. Additionally Business Confidence and it corresponding impact on the labor sector and wages growth with will be a topic of concern.

Inflation, the BoE’s primary mandate has remained soft in Q1. As such and despite encouraging jobs data and other economic green shoots, Carney is likely to emphasize a cautious approach to possible interest rate hikes; especially given external risk factors like Eurozone instability. With Sterling riding high on the UK election results Sterling could find itself stronger baring any surprise negativity.

Wednesday also sees British labor statistics published. Jobs data in the UK is a particularly bright light on the data calendar. As growth returns to the Kingdom the unemployment rate has steadily declined. Expectations are that data next week will reveal it has again ticked lower to 5.5%, a fresh post financial crisis low. The new hiring has created wage pressures in Britain, as such the Average Earning Index is expected to post +1.7%. This is important given that it would signal pay is risking faster than headline CPI. In turn suggesting that both economic slack has been taken in and that inflationary pressures are building; which could trigger tighter monetary policy (interest rate hikes) in the near future.

In this week’s podcast, we take tips from Yellen, discuss commodity currencies and preview next week’s events

Subscribe to Market Movers on iTunes