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Posted May 20th, 2010 by Charles Purdy

The Election and how it has affected the Currency Market

The UK has just had one of the most hotly contested elections in living memory which, as expected, resulted in a hung Parliament [no one party having a clear majority]. Whilst we saw the pound gain initially as the new Conservative – Liberal Democrat coalition was announced, it has fallen even further and has hit a 13 month low against the US dollar as the reality of the situation facing the UK has hit home. With the election now firmly out of the way, what will drive the value of the pound over the next few months?

Sterling has come under attack in the last few months over political uncertainty related to the perceived ‘weakness’ that a hung parliament would bring. Why has this been a problem? The UK needs to match income to expenditure that means tax hikes and spending cuts in order to start paying down the biggest deficit since WW II. Neither the Conservatives nor the Liberal Democrats made it clear in their manifestos exactly how they would tackle the huge deficit. Sterling has weakened since the election as the government has promised £6bn of cuts in the next year and many are concerned – especially with poor housing figures released this week – that aggressive cuts will stifle out the fragile growth that we have seen so far since the credit crunch. Looking at the UK relative to the USA, where interest rates are expected to rise at some point later this year, the USA becomes a far more attractive investment than the potentially stagnant economy of the UK. Whilst the markets have embraced the new government’s stance on aggressively cutting the deficit, they are tentative over its implication.

The new chancellor George Osborne releases his first budget on June 22nd, in which he will outline where the cuts are to come from in order to attack the record deficit. For the pound to strengthen there needs to be a clear plan of action that the financial markets thinks is realistic and addresses the core problems and which the “ruling” parties can agree in order for any legislation to get passed. This may seem like too much to ask. Firstly, there are potentially deep ideological differences between the parties on how policy should be implemented and it is likely that the markets will be sceptical of any budget clearing plan – especially given the scale of cuts and savings required.

As it stands, the outlook for the pound is poor against the US, Australian and New Zealand dollar or South African rand as these economies seem likely to retain the relative upper hand over our own. There may be one light at the end of the tunnel for sterling – the Euro zone. With the Euro zone in the midst of a debt crisis, the pound could take advantage and strengthen. Could we see sterling hit €1.20/ £1 in the coming months? We will have to wait and see. The best thing to do is call in sooner rather than later and speak to a currency specialist to ensure that you avoid missing out on favourable rates and ensure that you don’t lose money by buying at a poor time.
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Jargon Buster – Hung Parliament

This is where no one political party has a clear majority following an election. You usually find that the political party with the most seats takes the lead but they need to rely on other parties to support them. The support could be either in the form of a lose political agreement or based on a detailed agreement similar to the one we see between the Conservative and Liberal parties here in the UK.

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