With political and economic uncertainty continuing in light of the imminent UK general election, establishing a robust strategy to manage currency fluctuations is of utmost importance now more than ever. Ignoring the impact of the election result on currency fluctuations could spell disaster for businesses with FX risk exposure.
Speculating on the election as the Conservative’s lead over the opposition Labour Party narrows, Paul Langley, managing director of Godi Financial, suggests a hung parliament could be the worst case scenario of the election result. This is because it would cause the most disruption and delay in getting negotiations underway and agreed for Brexit. Consequently, many businesses without a well-planned FX strategy could suffer from a weakened pound, causing potentially catastrophic damage to a company’s bottom line and profit margins.
When Teresa May initially announced the snap election the Pound rallied as high as 1.2000 against the Euro, as it was widely believed her Conservative Party could comfortably beat the Labour Party and its perceived weak leader. But Labour leader Jeremy Corbyn has changed many people’s perception of him and the party’s manifesto has definitely attracted plenty of support, most notably from those under 25. Meanwhile Sterling has fallen as low as 1.1427 against the Euro due to uncertainty associated with the election outcome.
Just a month ago, Jeremy Corbyn was considered highly unlikely to become the next Prime Minister. Corbyn’s ratings with the general public seemed to be at rock bottom and the Tories were ahead in the polls by up to 20 points. However, four weeks on and that gap has narrowed to 5-6 points, with some people now seriously considering Corbyn as the next leader of the UK.
As Brits get ready to cast their vote for their next Prime Minister on Thursday 8 June, Langley considers what the outcome could mean for Sterling and why businesses need to act now to safeguard against potential financial loss:
“Defeat for the Conservatives could put massive pressure on the British pound and show the UK as rudderless, with no real cohesive plan for Brexit. If Labour does not achieve a majority, which appears likely, we would be faced with a hung parliament. This would be a catastrophe for all concerned and could mean an appalling deal on Brexit, along with pain for the economy as high-net-worth individuals and companies flee Britain because of Labour’s tax plans.
“It is very hard to imagine any scenario in which the Pound doesn’t get hit hard in the FX space should the UK be faced without a majority government due to the uncertainty that would arise. We could easily see GBP/EUR back down around the levels we saw following the flash crash episode last October, at or around 1.1000-1.1100. This is a major concern for businesses dealing with currency risk.
“Ultimately markets and investors like certainty, and a hung parliament provides no such prospect of that. Business leaders therefore need to take control of their FX exposure now to help create more certainty for their organisations during these turbulent times,” said Langley.