The currency market has been stuck in limbo over the past few days, following the indecisive nature of the electoral result.
Trading has been extremely volatile, with investors reacting to the news as it breaks from Westminster. The political scene as it stands has come as a positive for both the UK gilt market and the currency, with a substantial part of uncertainty now removed.
Duncan Higgins, senior analyst at Caxton FX comments, “The market’s leading concern is Britain’s fiscal predicament and how the incoming government chooses to address it. From the market’s perspective, the Liberals concession on the timing of cutbacks has been particularly positive. The view now is that a coalition between the Conservatives and Lib Dems should still have the strength to enforce the necessary measures to bring Britain’s finances back under control.”
Sterling rallied across the board yesterday following the news and is continuing to edge higher this morning. However, just as one period of uncertainty comes to a close, speculation builds on just how the coalition will work in practice.
“In theory, Cameron’s entrance into Number 10 will have calmed markets for the moment. However, building a stable coalition is going to be a tall task and there is already severe dissent being voiced on both sides about the concessions being made to accommodate the other. The situation remains on a knife edge, and sterling is certainly still liable to pull back should problems arise,” continues Higgins.
The other major factor buoying sterling is the fragility of the situation in the eurozone. The recent bailout failed to allay fears, and the euro’s status as a reserve currency is coming increasingly under threat. At present sterling is holding around the 1.18 level.
Duncan Higgins adds, “Providing there are no nasty surprises from Westminster in the coming weeks, we could see sterling back above €1.20 by June."
