Can the pound be protected in times of uncertainty?

Can the pound be protected in times of uncertainty?

It is now less than four week until polling day and the political machine has stepped up a number of gears. Although the Labour and Tory manifestos have not yet been made public, it is difficult to avoid the forthcoming General Election. However, despite a plethora of pamphlets, the outcome remains shrouded in uncertainty.

Although The Guardian felt compelled to suggest that the polls have “turned” in Labour’s favour, the margin for error and SNP factor make this seem like an imprudent judgement. Certainly there has been no rush at the bookmakers, where odds remain relatively static.

However, there has been one area of clear change. On the money markets investors have been purchasing insurance against sharp swings in the pounds value, illustrating the threat posed by uncertainty. The cost of insurance against volatility in the pound’s value against the dollar is now at its highest level since September 2011. Additionally, figures from the Debt Management Office suggest that foreign investors are cutting their holdings of government bonds over concerns of Sterling’s stability.

The currency market has a history of serving as a precursor to future movement on the bond and share markets in times of unease. Before last year’s Scottish independence referendum, for example, the value of the pound plummeted, falling to its lowest level in a year. On Friday morning Sterling fell to a five-year low of $1.46, from $1.48 on Thursday.

Responding to the fall, Michael Hewson, chief market analyst at CMC Markets, suggested that “the pound has started to come under some pressure in recent days as the prospect of political gridlock in a few weeks’ time starts to become a real possibility.” Black Rock, the world’s largest asset management company, have warned that the market have to date been “too complacent” in expecting a “smooth and swift government handover” and that a “soothing outcome for markets is hard to imagine.”

With polls so tight it is difficult to image a government being formed without some cross-party negotiation and real fears exist that an alliance cobbled together between volatile factions could find it difficult to pass substantive legislation. How, for example, would a Conservative government supported by a rump of Lib Dem, DUP and UKIP MPs develop a cognisant approach to regional devolution, let alone structural reform?

Whether Sterling’s vulnerability will enter the minds of the electorate, or indeed Parliamentary candidates, remains to be seen.

Historically, the City’s concerns have been reflected by the Tories, however, with David Cameron promising a referendum on Britain’s European Union membership should he return to number 10, it would be difficult for him to adopt this approach.

During his time as Labour leader, Tony Blair did much to win support from the financial sector, yet aside from shadow-Business Minister Chukka Umunna, Labour lack leaders with gravitas in this area. Certainly Ed Miliband has done little to endear himself on Threadneedle Street.

The splintering of British politics and emergence of new factions – from the SNP to UKIP – will be the hallmark of election 2015. However welcome it is to see new vibrancy across the political landscape it is difficult not to be concerned that it could lead Britain into uncharted waters. With growth still fragile voters should consider the potential ramifications of their ballot and assign as much value to their head as to their heart.

Jack Taylor

Jack Taylor

Consultant at Keene Communications
Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.
Jack Taylor

About the Author

Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.