Why is the UK pound so stable

Hope for Johnson's election victory makes the pound rise

The British currency has become the plaything of politics. For once, this has positive effects.

The twists and turns of the process of leaving the EU were reflected more clearly in the rate of the British pound than in the rates of shares or bonds. Even polls on the outcome of the parliamentary election on December 12th keep the exchange rate moving. Against the euro, the pound rose for the fourth month in a row in November. It is also higher against the dollar than in August.

Boris Johnson on the rise

Pollsters recently expected Prime Minister Boris Johnson to achieve a working majority in parliament. This could trigger another round of sterling appreciation, especially if the pound should break the $ 1.30 for a pound or 85p for a euro, according to the latest currency commentary from UBS. The most likely catalyst for this would be political developments.

The pound on the rise

Price for one British pound in dollars

Since Johnson announced his surprising deal with the EU in early October, investors have reversed most of the bets on a further devaluation of the pound, which had reached a record level in the summer, according to data from the US regulator CFTC.

A majority of 15 or more seats in the lower house for the Tories would be well received in the market. However, it is by no means certain that they will receive so many mandates, because the tactical voting behavior propagated by prominent opponents of leaving the EU can hardly be captured by opinion polls. In addition, the uncertainty surrounding Brexit would by no means be dispelled, because tough negotiations with the EU on future trade relations will begin after the exit.

Stay away from the pound

So it is no wonder that many banks advise their customers not to speculate on the future development of the pound exchange rate. If the Conservatives received only a wafer-thin majority, the Tories would not be able to easily get their pro-business election manifesto through parliament. The exit date could also shake, as Johnson has brought a number of Brexit rebels back into the party, who could cause him difficulties if they see an opportunity to prevent the exit from the trade bloc.

A Labor election victory or a coalition government led by Jeremy Corbyn would, in the view of foreign exchange experts, lead to a further devaluation because of Labor's planned dramatic increase in government spending.

Without a clear picture, the pound remains volatile

Should there be no clear majority again, the currency would remain the plaything of current political developments. Historical experiences with minority governments are contradictory, as BNY Mellon's currency strategist Neil Mellor points out. In February 1974 a Labor minority government under Harold Wilson came to power. While the pound lost ground against the dollar before the election, it reversed in March and gained over the next three months. From March 1977 to July 1978, James Callaghan (Labor) was tolerated by the Liberals.

The pound remained stable but was supported by a general weakness in the US currency. When the Tories and Liberal Democrats announced their coalition in May 2010, the British currency came under pressure, but recovered just a week later.