One of the tried-and-tested rules of the financial industry is that political uncertainty tends to weigh heavily upon currencies. A stark illustration of this concept can be seen in the falling value of the sterling due to recent election results and a hung parliament. One of the main issues is how much power the Conservative Party will retain, as many investors felt that they would have been able to provide more economic stability during Brexit negotiations. So, what are some of the primary factors that have caused the pound to fall and what can we expect in the coming months?
What Do We Know So Far?
There is no doubt that the pound has been in the doldrums when compared to other benchmark currencies such as the United States dollar and the euro. To put this into perspective, its value has fallen no less than 14% since the results of the 2016 Brexit vote. This movement is primarily thought to be the result of reactions to a “hard” Brexit; a withdrawal process that will be fraught with difficult negotiations and uncertainty over future trade arrangements. It is also believed that the pound will remain particularly weak against the value of the euro.
Why Such Negativity?
Political instability and an overall lack of clarity are the two main driving factors behind such investor sentiment. Many feel that Theresa May is not in a strong position and therefore, infighting may continue for some time. The so-called bottom line is that investors are simply not willing to place their confidence into the pound until more clarity is offered by the UK government.
On the other side of the proverbial coin, recent movements suggest that the FTSE 250 is trailing behind the FTSE 100. As the 250 is a strong barometer in regards to the British economy, this may be a further hint that domestic businesses are in for a rough time. As if these observations were not enough, financial powerhouse Moody’s recently suggested that their overall outlook for the value of the pound is bearish as they are likewise considering future political uncertainty. Currency traders will obviously listen closely to such conclusions, as these types of announcements can quickly evolve into self-fulfilling prophecies.
The Overall Domestic Psychology
Although much of the fiscal spotlight has been placed upon political deadlocks that still need to be broken, the impact of the private sector cannot be overstated. It is no secret that many businesses felt that the pound would fare poorly immediately after the election, particularly if no clear majority won. Pre-election surveys illustrated this fact, It was found that 46% of Londoners employed in private sector felt that the pound would fall substantially after the election.
The problem with this viewpoint is that such individuals are much more likely to curtail their spending habits until more stability materialises. Unfortunately, this might have a knock-on effect and cause the pound to fall even further before it encounters some form of baseline support.
What Can We Expect?
The value of the pound will not fall infinitely. Once post-election Brexit plans are clarified, we should certainly see some form of stability. It is also worth mentioning that a weaker pound could very well present attractive investment opportunities for those who are dealing in dollars and euros. Although this may not exactly represent the financial silver lining that the private sector has been hoping for, it is nonetheless a perspective to consider.
The future value of the pound will obviously reflect the state of political negotiations as well as overall investor sentiment. When greed enters into the marketplace, financial experts will always tighten their budgets. In some ways, such a negative movement is perfectly logical when we consider the current situation.