8 June: D-day for British pound

The British general election on Thursday is promising to be quite exciting. That is a setback for Prime Minister Theresa May - and the British pound.

On Thursday, the British population will head for the ballot box for the second time in a year. On 23 June 2016, EU membership was decided in the Brexit referendum. A year earlier, issuing the referendum seemed a masterstroke by then British PM David Cameron. 

Cameron trusted the majority of the British would prefer to stay in the EU. His plan was to create greater support for pursuing his political course. Instead, the Brexit camp achieved a narrow majority, after which Cameron resigned. It seems as if his successor Theresa May has now also made a major miscalculation.

May announced the new elections for the House of Commons in mid-April. By doing so, she wanted to make use of her growing popularity, which she owes to her hard line in the negotiations with the European Union. Her conservative party was 20 points ahead in the polls a month-and-a-half ago. With a larger majority in British parliament, May would be less dependent on some MPs who are devoted to a hard Brexit. Moreover, she would then not have to worry about new elections right after passing the deadline of the negotiations with the EU, during which she might be blamed for possible delays or concessions.

It seems as if May has shot herself in the foot when she issued early elections. On Tuesday evening, The Times published the results of a YouGov poll, stating that May’s Conservative Party could lose 20 seats. On the other hand, Labour - the main opponent of the Conservatives - would gain thirty. The Times immediately concluded that the poll had a fairly large margin of error. Nevertheless, the response of foreign exchange markets was felt. Within a few hours, the pound fell back to its lowest level by more than half a per cent against the dollar since the elections had been issued. The blow only seems to be the beginning of the pound's headaches.

After calling the election, the British currency recovered somewhat compared to the dollar and the euro. Traders anticipated May would get more room for implementing her own policy. By now, the exchange rate is back at the level of mid-April, with which the market factors in that the Tories will at least retain its majority. If that image has to be adjusted, the consequences will be large. The blow will be felt most if Labour gets a majority. The Party has major plans to reform the British economy. There is no clear strategy for the Brexit negotiations, which will cause uncertainty in foreign exchange markets. However, the probability of a Labour victory is quite small. It is more likely that May will not get an absolute majority and will have to seek another party to hold the majority in parliament. These negotiations will then fan political insecurity.

For the time being, the foreign exchange markets seem to mostly consider a Tory victory, but the odds are slowly decreasing. In almost any other scenario, the pound will be under pressure. Investors can therefore opt for a drop of the British currency, while entrepreneurs should look into options to cover their future earnings in pounds.