There has been no rest for the wicked, and the main mover for sterling this year is already here. Campaign posters have been unveiled, slogans honed and talking points distributed but there is no surer sign that the battle for the election is underway than seeing Sky News reporters standing in a fog of their own breath on some high street in a marginal constituency. That was the sight that greeted watchers this morning, and with it, the long drag into the May 7th has really started in earnest.
Within the next four months or so, there will be numerous highlights, rather more lowlights one would imagine, and a fair few gaffes. It is these oscillations that are set to be the winds that buffet GBP and other UK assets before we go to the polls.
As much as politicians of every stripe are not fans of giving a straight answer to a question, markets are not fans of unpredictability. That is this general election in a nutshell, and while the short-term prospects for further uncertainty remain, you have to think that investors will wait for the dust to settle before pledging cash to sterling or UK stocks.
At the moment, it looks like we will once again see a hung parliament once the votes are counted, with the Conservative party – in my opinion – moving to govern as a minority government instead of partnering with another party. Of course this would rely on the Tories having to count on other parties’ MPs to pass laws. The last instance of a minority government in the UK was back in 1997 when the Major government of the day lost its majority as a result of by-election defeats and defections.
The odds for no overall majority are currently 2/5 according to Irish bookmaker Paddy Power with a Labour majority at 7/2 and a Conservative majority at 9/2. The phrase ‘you never see a thin bookmaker’ is ringing in my ears.
It is in these cases that the minor parties hold the key. In 2010 that was the job of the Liberal Democrats, buoyed by Nick Clegg’s performances in the leader debates. In the election due in 121 days, the front runner for that position is led by Nigel Farage and the UK Independence Party. It is the emergence of euro scepticism as a main campaign topic that has seen this shift.
Major parties are shifting to the right to grab some of this limelight – Labour has planned immigration measures that use points scoring akin to Australia and New Zealand, while David Cameron told the BBC yesterday that should his party be returned to power then the planned 2017 referendum on the UK’s EU membership may be brought forward. Risks remain as well around the political commitment to deficit reduction. While we are a long way away from talking about a crisis of confidence in the UK’s finances, investors will look dimly on any plans to slow the rate of paying down the UK’s debts.
As we opened up today’s session, the first real one of the year, the picture was quite clear. Sterling opened up lower against the majority of its G10 counterparts, with it only able to gain against the European single currency, the Swiss Franc – which is being sold heavily to hold the EUR/CHF floor – and the Norwegian krone that remains impaled on the poor oil price outlook.
I am by no means a GBP bear through 2015; quite the opposite. In the short term, however, sterling sellers must be aware of the risks, especially against the USD, through the first part of 2015.