How will election impact currencies and what can you do about it?
When Theresa May called a snap general election on 18th April 2017, Sterling was trading at 1.1750 against the Euro, at 1.2550 against the US Dollar, at 1.6540 against the Australian Dollar and at 1.7900 against the New Zealand Dollar.
As news of the announcement broke Sterling gained 2.8 cents on the Euro, 3.5 cents on the US Dollar and 4.5 cents on the Australian and NZ Dollar. There were two reasons for this move; firstly, the currency markets don’t like surprises and this certainly was one and secondly, the Conservatives were enjoying a healthy lead in the opinion polls which is deemed positive for Sterling.
Back on May 17th 2015 when David Cameron won a clear majority, much to the surprise of the pre-election polls, Sterling rose 3.4% by the end of the week. Applying this logic, is why Sterling rose following the snap election announcement.
The landscape has now changed and Theresa May’s 24 point lead at the time of the snap election announcement has shrunk to just 3 points according to the latest YouGov poll. If this poll proves accurate on 8th June, there is a real possibility of a hung parliament and that could be catastrophic for Sterling. With Brexit negotiations due to begin before the end of the month, it is not inconceivable that the UK could start negotiations without a Government, without a cabinet and without a Prime Minister.
This outcome would lead to an unprecedented level of uncertainty for Sterling and it is possible we’ll see a similar reaction by Sterling as we did post-Brexit. Back then, pre-Brexit, Sterling was trading at 1.29 against the Euro, at 1.45 against the US Dollar and at 1.95 against the Australian Dollar. The next day the rates were 1.20, 1.32 and 1.71 respectively.
On the other hand, Theresa May wins, the Tories are re-elected and enter Brexit negotiations with a clear majority in Parliament. Should this be the outcome, you could expect Sterling to enjoy a similar boost to the one it received in 2015.
Whatever the outcome, Sterling will certainly react one way or another so being prepared is certainly the best plan for private clients and businesses who need to buy or sell foreign currency so we have outlined 3 options for you.
1. Buy or sell the currency you need to trade before election day
The first option will eliminate all currency risk by simply trading before the event.
2. Wait and hope the exchange rate moves in your favour after election day
The riskiest option and not for the faint hearted. If you are in the process of moving overseas or buying a property abroad, can you afford to take the risk over your future wealth or that your overseas property will cost more?
3. Hedge your risk
Combine 1 and 2 and do some of both. This is currently the tactic a lot of our business customers and some of our private clients are employing. If you are emigrating and are looking to move to Australia, you could look to transfer 50% of your funds now and leave 50% behind to transfer at a later date. There is a still a risk but a more calculated risk.
Whatever your situation, whatever your requirements, there is a solution to suit you.