With a few weeks ahead of the UK general election, analysts say an outright victory for the right-leaning Conservative Party is encircled with concerns about “Brexit”, or an U.K. exit from the European Union, which in turn could put the pound GBPUSD under heavy pressure in the aftermath.
Should the Tories win, leader David Cameron has pledged to hold an “in or out” referendum by 2017 on the issue. That would mean at least two years of not knowing whether the U.K. will retain its level of access to European markets, and even longer, depending on how exit negotiations go with EU members.
In the pre-election jitters, the local currency has already
seen some pressure from fears of a “Brexit”, said Kathleen Brooks,
research director at Forex.com.
“But it’s still mind-bogglingly unclear what that would mean for the U.K., and it’s going to be difficult to price in until it arrives,” she noted.
One worse-case scenario suggests that the U.K.’s GDP could be 2.2% lower in 2030 if Great Britain leaves the EU and doesn’t reach trade deals within the EU, independent think-tank Open Europe has calculated.
“The market will have to balance between wanting the Conservatives because they like their economic policy, against not liking their policy on Europe”, Brooks said.
The general opinion has been that markets tend to favor conservative governments, as they are seen as being more business-friendly. Moreover, since the Conservative-led coalition government took power in 2010, the U.K. economy has been moving quite well growing 2.8% in 2014, the fastest among Group of 7 developed nations.
A Conservative majority win
is “highly unlikely", as Angus
Campbell, senior analyst at FxPro, believes. The EU exit worries could
push the pound back to the $1.42-$1.43 level, if Conservatives win, he says.
But Craig Erlam, senior market analyst at Oanda, suggests the pound — currently at $1.49 — will be oversold on the uncertainty around the vote. An outright victory for the Conservatives would provide clarity and give a follow-on lift to the currency, he says.
