Forex Market Analysis provided by eToro
This coming May 6th, the UK general election will take place and traders worldwide are excited to see how the election results will affect the Great British Pound. We have prepared a short review of the coming election challenges and their possible outcome on the GBP.
The one thing that concerns the traders and economists alike is the current UK debt that currently stands on the whopping figure of £850 Billion. Everyone is keen to see a robust and credible plan that will ultimately tackle the enormous deficit issue. Why does it matter? Well it does, since a growing debt drives the UK Bank of England (BoE) to print and sell more and more government bonds (also referred to as Gilts) which in turn will bring UK interest rates up. The current UK reliance on low interest rates is crucial in short term to recover the now fragile UK economy of post-credit crunch era. If indeed interest rates will go up, it poses a significant risk to the crisis recovery course.
How will the election affect the UK debt? As in any democratic regime, introducing a good long term financial plan is a difficult task with potential protest from all over the political map. In order to introduce a plan to minimize the UK debt a serious majority of parliament is needed for support. This is where the election results have a major effect. If the election will end with a decisive victory to any party, fighting the debt will be potentially easier. If however the election will result in a hung parliament (where no party has a majority of seats in parliament) that the government’s ability to take decisive actions will be weaker and the BoE might be forced to raise rates sooner than expected.
We have listed below three major scenarios which might happen in the upcoming election so you could easily understand the potential market implications and opportunity.
Bullish on the GBP
Scenario one: Very bullish. Tories (conservatives) win the majority.
GBP bullish as the Conservative are eager to start cutting UK spending as quickly and efficiently as possible. This will in fact pave the way for deep budgets cuts in the year to come considering the UK Treasury already has a detailed scheme to cut the annual government deficit by half up to 2014.
Scenario two: Bullish. Labor wins the majority.
GBP bullish however since Prime Minister Gordon Brown already stated that fighting the UK deficits will only start next year as to avoid risking the fragile economic recovery. Bullish run will be weaker than a conservative majority although this could create a more sustainable sterling recovery for the long term.
Bearish on the GBP
Scenario three: Hung parliament.
This will cause some serious uncertainty as to the UK’s government ability to properly fight the growing deficit and follow through any financial long term planning. Weak parliament equals weak decision making which might lead to a struggling and confused economy.
What do the latest polls say?
Latest polls predict a hung parliament with Conservatives short by 61 seats from a majority. However since World War II, there has only been one exception to the rule that in UK voters do not elect hung parliaments.
Market Analysis provided by eToro
Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.
