Analyst: Pre-election volatility could send pound as low as $1.35

Analyst: Pre-election volatility could send pound as low as $1.35

21 April 2015, 10:56
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The forthcoming general election in the UK brings rough times for the local currency, with the lack of a favorite being the main concern. The volatility from that uncertainty has one analyst saying the pound could even hit $1.35 ahead of the vote.

The firm U.S. dollar has been the main pressing factor for the pound, but with only a few weeks to go to the ballot on May 7, analysts say they’ve seen a pickup in volatility and pressure on the British currency.

“It’s been a dreadful few months for sterling,” said Craig Erlam, senior market analyst at Oanda, noting the pound has been shoved back to levels not seen since 2010.

The concerning thing is that neither of the two main U.K. parties, the right-wing Conservatives and left-leaning Labour, has a clear lead. Moreover, support has seeped away from the Liberal Democrats, kingmakers after the last election who ended up governing in coalition with the Conservatives.

“I don’t see any reason why we can’t hit $1.35 before the election,” said Erlam, referring to the lack of the election clarity. Since early 2009, the British currency hasn’t been at that level, when financial markets were swallowed by the global financial crisis and dealing with the fallout from the collapse of Lehman Brothers.

While the most decent outcome for the pound would be the victory of the Conservative Party, the possibility of a so-called "Brexit" - as that win would lead to a referendum on the U.K. exiting the European Union - puts another pressure on sterling.

To date, the pound has lost about 4% versus its US peer, and has traded below $1.46, hit by the greenback’s general strength, as well as local factors such as dampened hopes for an increase in interest rates.

With so much “uncertainty regarding the result, I don’t expect sterling/dollar to head on too much higher,” said Angus Campbell, senior analyst at FxPro.

Source: MarketWatch

According to Goldman Sachs, it is “not an exaggeration to say that the outcome to this election is more uncertain than any in a hundred years,” with the May election promising to be the most open in decades.

Neither party looks likely to get the 326 seats needed for a majority in the 650-seat House of Commons.

Analysts are mainly looking at: The Conservatives (also known as Tories) could ally with the Liberal Democrats again, or with a grab-bag of small parties. The same goes for Labour— perhaps with the Greens or, as a long shot, the Scottish Nationalists. And there’s the least likely scenario of all: Labour and Conservatives teaming up to form a “Grand Coalition”.

The pound currently sticks to $1.49, after last week, when the dollar dropped on downbeat economic reports. The weak of gains has made analysts ask whether the general election can indeed have a big impact on the pound. However, let us remember that in September, Scottish voters were asked to decide in a referendum on whether Scotland should become independent from the U.K. The yes/no race unexpectedly tightened just before the ballot, yanking the pound lower.

“What the Scottish referendum told us is that the closer we get to an election, the more impact those poll numbers have on the currency,” said Kathleen Brooks, research director at Forex.com.

“Those last opinion polls will be absolutely crucial, particularly if they show a possible hung parliament or signal a messy coalition.”

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