May 08, 2015

Shock Result Boosts Sterling

Shock Result Boosts Sterling

Chief Currency Strategist Simon Derrick reflects on the UK election and its implications

The shock exit poll for the UK election on Thursday night led to a robust early rally for GBP as investors breathed a sigh of relief that the coming days would not see an extended period of negotiations over the makeup of the new government. A Conservative majority government is now confirmed and a 2017 EU referendum would look likely, and the Scottish National Party (SNP) may feel comfortable pushing for another referendum on independence during next year's Scottish elections. Evidence for a possible fresh referendum in Scotland emerged last week in the press following comments from the former deputy leader of the SNP.  

Looking ahead the principal concern among investors will be the possibility of at least one and possibly two referenda in the UK over the next few years. Many will remember how poorly GBP performed in early September last year in the face of a potential Scottish exit from the union and wonder whether the threat of two new votes could similarly weigh on the currency. While this could certainly prove to be a factor in the shorter term (though GBP is certainly holding up well for the moment) it is worth remembering two things. Firstly that both an EU referendum or a possible rerun of the Scottish referendum would be several years in the future. Secondly, the Scottish referendum in 2014 only impacted GBP in the immediate run up to the vote despite a tight race through most of the year. In other words we suspect these potential votes will not weigh on thinking for more than a week or so.

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