The 2024 UK General Election: Nothing to see here? Depends on where you look
The 2024 UK General Election: Nothing to see here? Depends on where you look
Conventional wisdom says that no matter how anxiously results are awaited, polls are watched and how much ink is spilt, election results usually have very little effect on global currency markets. In this piece we’ll test that theory with a perspective on three consequential elections: the UK General Election on 4 July; the ‘snap’ French election which will take place in two rounds, 30 June and 7 July. The US election, which takes place in November, dominates US headlines and front-page-below-the fold in many other global media.
Click here to listen to the companion podcast.
Click here to read and download the transcript for that episode.
The 2024 Election year: Arguably the biggest ever
2024 is the biggest election year in history, with roughly half the world's population — some 4 billion people in around 80 countries going to the polls.
At the time of writing, some elections have gone as predicted. Others have had more surprising results: some more close-run than expected and some upsets. Our focus here is not on the political implications, but on the repercussions on the global currency markets and global economic climate.
UK General Election: 4 July 2024
The UK local elections in May saw the Conservative party lose a number of seats — even some ‘safe seats’ — to the Labour Party. British law required an election to be held by January 2025, but after the May returns showed some Tory weakness Prime Minister Sunak called an election for 4 July.
The Financial Times’ early June polling projected a 97% chance of a Labour majority. More recent numbers show Labour still more than 21 points in front of the Tories.
A closer race was expected for the last general election (2019), which would have indicated some sterling volatility. But the election was called fairly early, and that didn’t happen.1
With the 2024 election, then, it could well be that the market is expecting a Labour majority and is relatively sanguine about the effects. The Labour majority could already be priced into the market.
The Labour Party seems to be positioning itself as more business-oriented, and more toward the centre, calling itself the Party of Growth, the Party of Enterprise2. Those are comments from Rachel Reeves, the shadow Chancellor of the Exchequer. Labour leader Keir Starmer keeps talking about his goal of wealth creation for everyone.
Further, Labour have said they want to improve relations with the EU, but they're not looking at going back to the single market.
The market may well give the Labour Party three, six, perhaps nine months’ grace, as it did in 1997 with Blair’s Labour party. So we will likely see a sense of stability in the pound.
We have learnt, over the last decade or more though, to expect the unexpected in UK elections.
If there isn’t a clear mandate for Labour, resulting in a hung parliament or minority government we could see the pound wobble a bit. But that probability, considering the bookies’ odds and the pollsters’ projections, is slim.
Given the current expectation for a UK Labour majority, we know the potential turning points are for the pound going forward.
At the moment we are seeing some positive sentiment around the pound and on sterling/euro, especially after the EU Parliamentary Elections and France calling a snap election on the back of it.
EU Parliamentary Elections 6-9 June: Results and Implications3
The recent parliamentary elections for the European Union held more surprises, with France’s hard right National Rally party, headed by Marine Le Pen, winning more seats than expected. Germany’s results also showed a shift to the right.
We have been seeing an increase in voters’ frustration over the course of the last 10 years, with Italy over the last five and in Eastern Europe, resulting in more far-right/more-right-of-centre sentiment. This could cause could well cause concerns in the FX market and unsettle the euro.4
France Election: 30 June and 7 July
French President Macron has called a ‘snap’ election for 2024, with the first round on 30 June and the second on 7 July. The French election is now running in tandem with the UK election, which may have implications for sterling/euro.
Macron’s party have been struggling to implement policy since it lost its majority in the 2022 elections. At the time of writing on 13 June, Macron is approximately about 15 points behind the far-right National Rally party5.
If Macron’s party doesn’t win the majority, France could see a ‘cohabitation’ government, with a far-right Prime Minister governing domestic politics and policies, and President Macron managing overseas and international relations; again, more possible bumpiness for the euro.
The next six months: and the US elections
Politics may have an outsize impact on the currency markets over the course of the next six months. It's just not necessarily going to be a UK based-impact.
With the US election now less than five months away, we know who the contenders are, which is reassuring for the financial markets. Biden is the current president and Trump, the previous.
The market expectation, is, to some degree priced in no matter the outcome: it’s neither here nor there from the FX perspective. Which is quite a strange situation when polls indicate a very close race.
The bigger story: interest rates and the central banks
We could argue that we have gone through a period where the central banks had nothing to do: no one could raise rates and no one could cut them.
We're now at a stage where, after aggressive interest rate hikes over the last two years, this cycle seems to have come to an end. It is more a case of ‘When do they start to cut? And how aggressive are they when these cuts materialise?’.
The Bank of England’s next interest rate decision is imminent.6 Market expectation from most companies is that it will be a hold, but a dovish hold. That forward guidance may not mandate a cut, but it could indicate a cut happening later this summer. Expectations between now and the end of the year—over the next six months — is one to two cuts from the Bank of England.
The European Central Bank (ECB) cut interest rates last week7. And the expectation is that they will cut rates again before the year’s out.
And then there is the US Fed (Federal Reserve). Given the latest data, the market expects a cut over the next three months. Cuts are expected in Q4 as well.
And by this time next year, it's expected that all the central banks we're covering here—the ECB, the Bank of England, and the Fed—will all put cuts in place of 1%, maybe even more, over that 12-month period.
So it’s less UK politics and more global politics.
2024 into 2025
The second half of 2024 is more likely to be dominated by the central banks than it is by any other impacts of elections. the actions of the Bank of England, the ECB, the US Fed, from where we sit, may well be more impactful than the political landscape
One example of that is the US election. Last time, Trump stated he wanted a weaker dollar8. He’s also recently said we would replace Fed Chair Jerome Powell9.
Some believe he’s done fairly well, bringing inflation down from 9.1% or so10 to the 3.3% in May 2024.11 But Powell’s departure might to alarm the financial markets, increasing volatility.
Deficits are also a concern. The US has got a $34 trillion overdraft12, a budget deficit. And if that continues to go higher, we may see some volatility from there. France also needs to balance its budget.
Flocks of black swans?
Over the past five years we’ve seen more exaggerated movements: COVID; political turmoil in the UK; unrest in Ukraine and in the Middle East recently, These events show how rapidly the market can turn, the pound can weaken.
But the reality is, looking at the last five years, ten years, even in our own UK politics over the last 10 years, we’ve seen several general elections, referendums, changes of Prime Ministers within government cycles.
It appears that the UK general election is a bit of a damp squib. We can’t assume that once that is out of the way, and 2025 begins, that market stands still, that we can afford to sit on our hands, that no risks exist. Rarely has that proven to be the case.
Mitigating risk, come what may
If you’re a corporate with FX exposure, whether it comes through your costs or sales, or revenues that generate profits abroad, the reality is, FX market is going to impact your bottom line. The question is how significant that impact is going to be.
Obviously, you can't determine where markets are going. It's also got to fit: very much a horses-for-courses, case-by-case basis.
Some corporates have far more latitude because they can pass costs on to their suppliers or their customers. Some others have shorter sales cycles and can update prices close to the market.
In these cases, FX risk is part of the pricing mechanism, rather than determining whether the business is profitable or not, and how much of a profit.
On the other hand, some businesses have six-months, 12-month, 24-month planning, forecasting, and budgeting cycles, and FX risk is within those periods.
Once you know foreign exchange risk exists: once you've planned for it, you're forecasted for it, it is a part of your business.
Once you have decided to put a plan in place, how far out, your hedge ratios; what you’re leaving unhedged, are a personal preference.
Click here to listen to the companion podcast.
Click here to read and download the transcript for that episode.
Thanks to our London-based contributors:
Gary Wilkinson, Corpay Cross-Border Senior Trader
Trevor Charsley, Senior Market Strategist
Darryl Hood, VP and Senior Director of EMEA Sales and Trading
Please note: The opinions expressed on FX in Focus are those of the speakers only, and do not necessarily reflect the views of Corpay Inc. Any figures quoted in the podcast are correct at the time of recording (13 June 2024) and the interest rate analysis comes from BBG WIRP analysis.
1 2019 election results: https://commonslibrary.parliament.uk/research-briefings/cbp-8749/
2 https://www.bbc.com/news/videos/c255jygkgrno
3 EU Parliamentary election results: https://results.elections.europa.eu/
4 Here is an example of a knock-on effect: Luxury brand Golden Goose (of the artfully dirtied sneakers) has halted its IPO: https://www.leaprate.com/forex/market-news/golden-goose-market-listing-halted/
5 https://www.france24.com/en/europe/20240609-france-s-macron-calls-snap-election-in-huge-gamble-after-eu-polls-debacle
6 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2024/june-2024
7 https://www.bbc.com/news/articles/c511jy6z41vo
8 https://www.reuters.com/article/business/graphic-trump-wants-weaker-dollar-but-it-could-be-a-hard-sell-idUSL2N24J0QI/
9 https://www.reuters.com/world/us/trump-would-not-reappoint-powell-fed-chief-2024-02-02/
10 June 2022: https://www.usinflationcalculator.com/inflation/current-inflation-rates/
11 Ibid.
12 https://www.statista.com/statistics/273294/public-debt-of-the-united-states-by-month/#:~:text=In%20April%202024%2C%20the%20public,around%2032.6%20trillion%20U.S.%20dollars.