Simon Derrick: The British Pound and the UK’s General Elections
| Chief Currency Strategist, BNY Mellon
With the UK general election fast approaching on 8 June 2017, BNY Mellon’s Chief Currency Strategist Simon Derrick looks at what lessons we can learn from previous elections and historical movements of the British pound (GBP).
May 1, 1997
- Opinion polling beforehand: Surveys taken in the month prior to the election put support for Labour between 43% and 55% of those polled, while the Conservatives held between 26% and 37%.
- The outcome: A Labour government (majority 179)
- GBP's average price for previous decade: US dollar (USD) 1.6560
- GBP's performance ahead of the election, and shortly thereafter: Prime Minister John Major called the election on March 17. Although GBP took a brief dip over the next 48 hours to hit multi month lows below USD 1.590, it subsequently recovered rapidly through until the start of April, hitting a high above USD 1.65. This, in turn, mirrored a narrowing in the polls in the second half of March and came despite the fact that the gap between the two main parties was still near 20 percentage points wide by the end of the month. From the start of April through until the election itself the story was one of stability for GBP as the polling at this point levelled out. Although GBP had a brief sell off on the day after the election, it rapidly recovered.
June 7, 2001
- Opinion polling beforehand: Surveys taken in the month prior to the election put support for Labour between 43% and 55% of those polled, while the Conservatives held between 25% and 34%.
- The outcome: A Labour government (majority 167)
- GBP's average price for previous decade: USD 1.5960
- GBP's performance ahead of the election, and shortly thereafter: Prime Minister Tony Blair called the election on May 8. GBP was trading around USD 1.43 at the time. Over the remainder of the month GBP came under increased pressure, finally bottoming out the week after the election below USD 1.37.
May 5, 2005
- Opinion polling beforehand: Surveys taken in the month prior to the election put support for Labour between 37% and 42% of those polled, while the Conservatives held between 27% and 35%.
- The outcome: A Labour government (majority 66)
- GBP's average price for previous decade: USD 1.6090
- GBP's performance ahead of the election, and shortly thereafter: Prime Minister Tony Blair called the election on April 5. GBP was trading around USD 1.88 at the time and rallied a further 3 cents over the course of the next two weeks. However, GBP started to come under increasing pressure in the immediate run-up to the election and, in the two months following it, eventually bottoming out around USD 1.72 in mid-July. Interestingly, the sell-off coincided with speculation in the aftermath of the election over the longevity of Tony Blair's likely tenure as Prime Minister.
May 6, 2010
- Opinion polling beforehand: Following the first televised debate of the party leaders on April 15, the Liberal Democrats saw a sharp rise in the polls (in some cases overtaking the Conservatives). After the second debate on April 22, the Conservatives regained a narrow lead (on average about 3 percentage points) over the Liberal Democrats, with Labour a further 2 percentage points behind. This raised the possibility of a hung Parliament (as in 1974).
- The outcome: A Conservative/Liberal Democrat coalition government (majority 78)
- GBP's average price for previous decade: USD 1.7000
- GBP's performance ahead of the election, and shortly thereafter: The election was called by Prime Minister Gordon Brown on April 6. Although GBP initially recovered slightly, it peaked on April 15 following the strong showing of Liberal Democrat leader Nick Clegg in the first televised leaders’ debate. Between then and the election GBP fell from USD 1.55 to USD 1.48. Further losses emerged over the next week as uncertainty over the composition of the coalition government became the dominant theme. This would last for a further week after the coalition was finally agreed upon on May 12.
May 7, 2015
- Opinion polling beforehand: Surveys taken during the election campaign showed neither the Labour Party nor the Conservative Party established a consistent lead.
- The outcome: A Conservative government (majority 12)
- GBP's average price for past decade: USD 1.6890
- GBP's performance ahead of the election, and shortly thereafter: The Fixed-term Parliaments Act 2011 led to the dissolution of Parliament on March 30. Initially GBP came under mild pressure, dipping from USD 1.48 to USD 1.45 on April 13. However, GBP recovered sharply from April 14 onwards following the publication of a Guardian/ICM poll giving a six point lead for the Conservatives (this stood in sharp contrast to other recent polls which had shown one party or the other with a very slight lead). GBP continued to recover from here despite the polls reverting to their previous patterns. By election day GBP stood at USD 1.52, and by a week later it had (briefly) reached USD 1.48.
Several aspects stand out from this review of the price action around general elections over the past 20 years.
- GBP has tended to put in an improved performance when the Conservative party has done relatively better in opinion polls (although 2005 is an outlier in this regard). Interestingly, in 1997 this happened even though there was no realistic chance of a Conservative victory emerging. This suggests that relative shifts in polling in the run-up to an election may have an impact on GBP, even if the absolute gap between the two main parties remains substantial.
- The market has tended to dislike uncertainty (with 2010 providing the best example of this).
- The threat of a coalition in 2010 was treated poorly by the market. This came despite the fact that GBP remained relatively stable during the period of the 1974 Labour minority government and had actually rallied during the time of the Lib/Lab pact in the late 1970s.
- The price action on GBP in the run-up to the election is not necessarily a guide as to what happens afterwards. GBP performed well between 2010 and 2015 during the lifetime of the coalition government. GBP was also consistently strong through most of the period of the three Labour governments between 1997 and 2010.
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- Electoral data: http://www.parliament.uk/about/how/elections-and-voting/general/previous-general-elections-in-the-uk/
- GBP's average price for previous decade and GBP's performance: Reuters terminal
- Opinion polling: Gallup, MORI, Harris, NOP, ICM, CM, Rasmussen, Populus, Ipsos MORI, ComRes, YouGov, BPIX, Opinium, TNS, BMG, SurveyMonkey, Survation, Harris Interactive, Angus Reid Public Opinion, Panelbase and Lord Ashcroft.