Now that the U.K. general elections are over and the Brits are done fussing over the new royal baby, let’s take a look at what the exit polls are showing and what the results might mean for the British pound’s forex price action. If you’re thinking that political updates don’t really have a direct influence on currency movements, then lemme remind you that a country’s political situation can have a pretty strong say in economic policies and developments!
As the pre-election surveys have suggested, the rival political parties are neck and neck when it comes to securing a majority in parliament. Current Prime Minister David Cameron’s Conservative Party is in a tight race against the opposition Labour Party and its leader Ed Miliband – neither of which are expected to grab at least 326 seats enough to guarantee an absolute majority.
Exit polls project that the Conservatives probably won 316 seats while the Labour Party might’ve scored 239 seats, with the remaining 95 spots in parliament divided among the other smaller parties namely the Liberal Democrats, the Democratic Unionists, the Scottish National Party and the U.K. Independence Party.
Now I’m not too well-versed in the ins and outs of U.K. politics, but I do know that the lack of a majority government might have negative repercussions on the economy. After all, opposing political parties tend to have different views on which economic goals to prioritize, which One Direction member is the best, what policies should be put in place, or how to handle another Scottish independence referendum among many others. This could result in a hung parliament, wherein a stalemate between the governing political parties might lead to delays in passing legislation needed to support the U.K. economy.
Of course a coalition government could still be formed, and this would be a slightly better outcome compared to a hung parliament. The Conservatives are likely to be in talks with the leaders of the Liberal Democrats, which is their current coalition partner, along with the Democratic Unionists and the U.K. Independence Party, to have a somewhat unified front.
Based on the pound’s forex reaction to previous U.K. election results, a hung parliament or coalition government tends to spark a sharp decline for the British currency, as traders price in political and economic uncertainty. However, pound pairs might soon be able to recover once the newly-elected leaders are able to restore market confidence in their government. Either way, the pound could be in for an extra dose of volatility while market watchers weigh in on how the election results could impact the U.K. economy in the longer-run so make sure you watch out for potential weekend gaps, too!