The pound was unmoved overnight as the results of the UK general election confirmed what markets had long been pricing in: a Labour landslide victory.
The margin of victory will end up being quite a lot less than both the polls and projections had anticipated. Currently, Labour has won 411 seats in the House of Commons versus 119 for the Conservatives with 6 seats to declare. Whilst this isn’t quite the 280 seat majority that some had braced for, this will do little to obstruct new Prime Minister Starmer’s ability to force policy changes through the House of Commons.
Sterling has been supported in the lead-up to the vote, as investors currently see a Labour government as the best-case scenario for the UK economy. In particular, expectations that they will favour closer UK-EU relations has seemingly increased business confidence. Starmer will now have to convince investors that he has a credible fiscal plan that will boost UK growth to ensure that he doesn’t trigger an adverse reaction in bond markets (as what happened after Liz Truss’s mini-budget). Any suggestion of larger tax hikes than those laid out in the party’s manifesto would, however, likely be greeted negatively by market participants.
As a result, the GBP/USD trades towards the higher end of the range we’ve seen this year and currently at a 3-week high. The GBP/EUR remains buoyant but barely moved from yesterday with the market trading around 1.18.
Today’s US non-farm payrolls report will be the next big event for markets, followed by Sunday’s second round French election. So far, markets have been reacting in a sanguine manner to the French election, as Marine Le Pen’s far-right party are seen falling short of an absolute majority. Should this be confirmed at the weekend, the euro could rally modestly, albeit this seems largely priced in. A surprise National Rally majority would almost certainly trigger some downside in the Euro.
