Pound unfazed by Labour landslide

05 Jul 2024

Sterling has shown no significant reaction to the Labour Party's substantial election victory overnight, and analysts indicate they continue to hold a positive view on the currency's future prospects.

At the time of writing the Pound to Euro exchange rate remains at 1.18.

“In FX, Sterling remained firm following the UK general election, in which the Labour Party obtained the large majority that polls anticipated, as GBP-USD and EUR-GBP are still trading close to 1.28 and below 0.85, respectively,” stated Roberto Mialich, FX Strategist at UniCredit.

As reported by Pound Sterling Live, Labour has 409 (+213) of 641 seats at the time of writing, the Conservatives 199 (-249), Liberal Democrats 71 (+60), SNP 8 (-36) and Reform 4.

Foreign exchange analysts are optimistic about the Pound's future, expecting it to strengthen further due to a recovering economy and the potential for improved trade relations with the EU under a Labour government.

Indeed, Barclays analysts stated that Labour’s willingness for a closer relationship with the European Union “suggests scope towards a closer relationship and a further modest – but non-negligible – Brexit premium unwind.

"Our new forecasts envisage sizeable gains for the Pound versus the Euro, with EURGBP reaching 0.80 in the coming quarters. French political risk is an additional tailwind for the Pound,” according to a Barclays currency note.

“From here, what will be important to GBP and other UK markets are which parts of its electoral platform Labour intends to keep, and their economic impact. The incoming government’s policy agenda will be outlined in the King’s speech to Parliament on 17 July,” according to Joseph Capurso, Commonwealth Bank FX strategist.

However, the French election, particularly the second-round vote on Sunday, is seen as more crucial for the Pound-Euro relationship. The outcome will solidify the political and fiscal outlook, which currently remains uncertain, the Pound Sterling Live report adds.

It is widely expected that no single party will secure a majority in the National Assembly, leading to a hung parliament.

“We do not know really how this would work,” said a note from Crédit Agricole before the second-round vote.

“Given the market reaction to the results of the first round, a hung-parliament scenario is considered more positive than a scenario in which the RN obtains an outright majority. However, even in case there is a positive knee-jerk reaction, we expect such an outcome to ultimately weigh on the single currency,” UniCredit’s Mialich added.