Politics, Personalities and the Pound

4 months ago admin Comments Off on Politics, Personalities and the Pound

The currency markets are vast multi-national operations dealing with huge quantities of money and having a direct and powerful impact upon everything from the price of a bottle of imported wine to the value of a person’s pension. Given the size and influence of the markets it can seem somewhat shocking to realise how much of the movement which takes place within them can be put down to the actions and behaviour of a single person, even if that person happens to be the Prime Minister of the UK.

Looking at the rise and fall of sterling in response to statements given by Theresa May in the last few months is, however, highly instructive, particularly for anyone still harbouring the somewhat quaint idea that policies matter much more than personalities where big picture politics and economics are concerned.

Speech

Back in January, Mrs May gave a speech setting out her 12 priorities when negotiating Brexit. Despite the fact that she confirmed the UK would not be staying in the single market, the fact that the speech introduced a degree of clarity into what had hitherto been a highly confused situation did lead to a positive response in the markets.

Immediately following the speech, sterling rose by 3%, a rise based on the impression that Mrs May was a ‘safe pair of hands’ to steer the Brexit negotiations. This positive impression was seemingly re-affirmed in April this year when Mrs May announced a snap general election and the immediate response was for the pound to rise by 2%.

Campaign

The manner in which the campaign itself has panned out, however, has seen the pound fluctuating as the presumption that Mrs May would be heading for a very large majority, and with it a strong hand in the negotiations, has slowly been eroded.  The clearest example of this to date came on May 28th when a YouGov poll which appeared to predict a hung parliament caused the pound to dip below $1.28. Although this poll can probably be dismissed as something of an outlier, what it does underline is the fact that the election campaign is not going at all according to the presumptions which underpinned the initial positive response.

As a result of this, the pound has been the second worst performing major currency against the dollar throughout May, and has dropped more than 3% against the Euro over the same period. The reaction of the currency exchange markets has, to a large degree, been based upon the erosion of an assumption that a May government with a three figure majority would be in a stronger position to negotiate an effective Brexit package.

Another part of the picture, however, is the gradual wearing away of the notion that Mrs May represents a clam and steady influence. Perhaps the key example of this came with the change of policy on social care, an unprecedented occurrence in which a firm manifesto commitment was the subject of a screeching U-turn not much more than 24 hours later.

No matter what the size of her eventual majority (and the average of polls is still pointing to a strong conservative victory), there’s no getting away from the fact that the campaign itself has caused damage to what might be called ‘brand May’ and this damage has been reflected in the reaction of the markets.