#30 The UK General Election's Influence on Pound Sterling

Welcome to the Wise Wealth Podcast, hosted by Samuel Leach. In this special 4th of July episode, we delve into the pivotal UK general election scheduled for today and its potential impact on the pound sterling. With polls indicating a likely Labour Party victory, we explore what this means for the UK's economy and currency.

Samuel breaks down key factors to watch, including political stability, fiscal constraints, and the role of monetary policy. Learn about the constraints facing the new government and why political stability might benefit the pound, even if economic impacts remain limited.

Join us as we analyze inflation, interest rates, and the future path of the pound against the US dollar. Don't miss Samuel's personal outlook on potential interest rate cuts and how these changes could shape the market. Follow Samuel on Instagram and YouTube for further insights and detailed analysis.

Tune in to understand the complexities of the UK election's influence on the financial markets, and support the growth of our top 100 investment podcast. Happy Independence Day to our US listeners, and a crucial election day to those in the UK!

Episode Transcript

(00:00):
Welcome to the Wise Wealth Podcast. I'm back, Samuel Leitch as your host. It is the 4th of July.
Happy Independence Day to everybody in the USA.
Whilst we come over to the UK, we have got some big news to be covering on this
podcast and I thought it was really important for me to jump on this podcast
at 7am today to discuss the upcoming

(00:22):
UK general election and its potential impact on the pound sterling.
With the election scheduled for July 4th today there's a lot of stake in the
UK's economy and our currency is going to be pretty crazy to see what happens
and I'll be breaking down key factors to watch and what we can expect in the
aftermath of the election.

(00:43):
So let's pretty much get started and start discussing the impact of the election on the pound sterling.
There's lots of different mixed views on this around the
world from different analysts so let's break
this down from a simple approach as we approach the general
elections polls are indicating a likely
victory for the labor party and bookmakers are giving them a 90 probability

(01:06):
of winning a majority but what does that mean for the pound sterling for all
of you fx traders out there firstly regardless of which party wins the new government
will be facing in significant fiscal constraints,
high debt levels, low economic growth and strict fiscal rules.

(01:27):
This will all limit their ability to borrow and spend.
This means that monetary policy rather than fiscal policy will be the main tool
for stimulating growth and these are areas that we're going to be focusing on.
So when we look at political stability and the pound, and we have seen a little
sharp move on pound against the US dollar over the last couple of days,

(01:51):
and there is an argument that having political stability resulting from a Labour
majority could benefit the pound sterling.
A strong mandate for Labour could lead to greater political stability.
It's typically seen as a positive for the currency if we can have political
stability And the argument is that over the years of the Conservative government ruling,

(02:15):
whether rightly or wrongly, when we look at it, different prime ministers switching
over and switching over, a lot of turmoil within the Conservative Party as this
created political instability.
So if you like Labour or you don't like Labour, overall, if it's an overall
majority, we could see political stability. Now, on the international stage,

(02:41):
that is important because it can be seen positive for the currency.
Head of FX Research at MUFG Bank said that this stability, combined with cautious
economic policies from Labour, could strengthen trust in the UK's governance
and economic management on the international stage.
And this is very important. When we look at this from fiscal constraints and

(03:04):
an economic impact, despite the potential for political stability,
the economic impact of this election may be limited.
When we look at this and we break this down further, the UK economy is struggling
with stagnant productivity and this ultimately is putting pressure on public

(03:26):
finances and it reduces fiscal headroom of exactly how they can tackle the economy.
This lack of fiscal space means that significant tax and spending changes are
unlikely regardless of who is going to win this election.
When we look at this even further from sentiment, suggesting that while the

(03:48):
election will mark a significant political shift, its economic impact is likely to be negligible.
Constraints on fiscal policy will mean that the market, interest rates,
expectations and guilt yields are unlikely to change significantly after the election.
This is important just because there's not that much wiggle room in simple terms

(04:12):
for whichever party is elected.
What do we look at when we look at inflation and interest rates?
One of the key areas which economists differ on is the future path of inflation
in the UK and its impact on the pound sterling.
High inflation typically forces the Bank of England to raise interest rates,

(04:33):
which can attract foreign capital inflows and support the pound.
However, the next government's limited fiscal headroom will place the burden
on stimulating growth on monetary policy. Very different.
When we look at this a little bit further, higher than expected inflation could
make it difficult for the Bank of England to cut interest rates quickly,

(04:54):
which would support sterling.
On the other hand, when we look at this, there's other economic analysts out
there that are more optimistic about the falling inflation which could allow
the Bank of England to lower interest rates potentially leading to a weaker pound.
When we look at this further, capital economics expects that pound against the

(05:17):
US dollar to fall to 1.22 by the end of 2024, before rising again in 2025.
One of my personal outlooks is I do think that we are going to see interest rate cuts.
I don't think we're going to see anything potentially until September,
but I do feel that we may see one to two small interest rate cuts in the UK.

(05:41):
So overall, there is little wiggle room for the winning party.
It looks like there's a 90% majority here that Labour are going to win when
they go into the polls today.
So it's going to be very interesting to see how this pans out.
So overall, in summary, while the UK general election is likely to bring significant

(06:01):
political change, it's economic impact that we care about and the economic impact
may be limited due to the fiscal constraints.
Political stability from a Labour majority could benefit the pound sterling,
but the real driver will be how inflation and interest rates evolve post-election.

(06:22):
So overall, actually, even if you're not a Labour supporter,
having political stability, regardless of which party it is,
can be seen as favourable to the pound FX rates.
Overall it's going to be really interesting to see
how this goes post elections and interested to
hear your thoughts make sure you're following me on instagram instagram.com

(06:44):
forward slash samuel leach or the same again youtube.com forward slash samuel
leach on youtube i'm going to be putting up my pound against us dollar analysis
this sunday so make sure that you tune into that video on on YouTube.
And most of all, make sure we hit follow, leave a review on the podcast and

(07:05):
support the growth of this podcast.
We did hit top 100 investment podcasts in the UK, UAE and Singapore.
So thank you so much to everybody that's tuning into my podcast and listening
to my thoughts and economic outlooks of the markets and investment space.
Take care, everybody, and I'll see you in the next episode.