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May 2015

Sterling surges on unexpected election clarity

Published: Friday 08 May 2015

The polls got it wrong, the pundits got it wrong and the parties got it very wrong but, with most of the results now declared, Britain looks set to have a government consisting of a Conservative party with a very slender majority. The bumpy ride that has weakened the Pound over the last few months came to an abrupt halt.

The markets loved it. Sterling, which has been, very predictably, declining in recent weeks, surged on the first hints of the Conservative gains. That probably has more to do with the certainty that a clear winner brings to the economy rather than the colour of the rosettes involved. Such a tight and complex election was bound to weaken the Pound and markets like clarity. The clear picture of a majority government after 5 years of watered down coalition policies was always going to be a winner for the pound.

So, having gained four and a half cents against the Euro, three cents against the US Dollar and having made similar gains elsewhere all in the space of a few hours, what happens to the Pound now?

The answer to that lies not so much in the politicking as it does in the economic performance of the UK. We had an insight into the challenge for UK PLC with a marginally improved trade deficit this morning; further evidence that if Britain wants to export its way back to growth, it needs some overseas markets to sell to and those economies are not keeping pace. Hence, higher demand in the recovering Britain is boosting imports but the strengthening Pound is hampering exports and Britain`s greatest export opportunity, Europe, is still very firmly in the doldrums.

And, speaking of Europe; that is another of the UK`s challenges. David Cameron has committed to deliver an EU referendum before 2017 but he has also said he will try to renegotiate Britain`s relationship with Europe and offer two alternatives to the status quo; a new agreement or an exit. This is a huge hill to climb and the more that is dicussed about a potential UK exit from Europe, the more the Pound will struggle.

And Sterling`s current recovery has a lot to do with the performance of the UK economy relative to others. So whilst the Eurozone is struggling, China is slowing and the US recovery is tenuous, the UK looks like a beacon of virtue. However, within the next few years we ought to see a recovery in all of the economies mentioned above. Therefore, in relation to those economies, the UK, which started earlier than the rest, may well be caught up and that will rebalance the value of the Pound.

In essence, with the politics currently being settled for another 5 year fixed term parliament, the market focus will shift back to the reality rather than the rhetoric and that will throw up a few spikes and troughs along the way. Are you ready for yet another bumpy ride?