The British pound has strengthened against other major currencies over the past week as the landslide victory of the Labour Party brings optimism towards political stability in the country.
Unlike the French electionsThose of the United Kingdom have instilled confidence in the markets, and the pound has reached Highs of almost a month against the dollarThe pair hit 1.2848 on Monday, its highest level since June 13, before retreating to just under 1.28 on Tuesday.
The pound has become very attractive for investorsas the Government is expected to Labour bring stability to fiscal policy after 14 years of Conservative rule. Not only the currency, but also British government bonds and blue-chip securities performed well after the election result in the United Kingdom.
Optimism over Labour victory
The United Kingdom has suffered the Brexitthe pandemic, the rising cost of living caused by the war, the gilt crisis (UK Government bonds) and the Scottish referendum.
Public discontent with the ruling party has been growing over the past decade, leading to the landslide victory for the Labour PartyWith the centre-left party at the head of the government, citizens hope that its policies will bring stability to the country.
Labour has also promised no tax or social security increases, decarbonisation, increased housing supply and reduced migration.
BlackRock noted in its market commentary that UK equity valuation is attractivebased on weak growth prospects. This indicates that the investment bank expects the country’s economy to rebound under the new government.
The pound rose during eight consecutive sessionsfrom June 27 to July 8, amid optimism on the political front, marking the longest winning streak since 2020.
Net leveraged long positions on the pound jumped to their highest level since April 2018 in the week ending July 2, while short positions on the pound fell to their lowest level in more than a year, according to data from the Commodity Futures Trading Commission (CFTC).
In addition, construction-related stocks including Travis Perkins, Howden Joinery, Forterra and Ibstock have risen over the past week on the back of the Labour Party’s plan to increase the housing supply.
Bank of England keeps rates on hold for longer
Sterling has also been supported by the Bank of England’s stance to keep rates higher for longer. Despite expectations that the BOE will start cutting interest rates in August, a member of the Monetary Policy Committee indicated that the The fight against inflation is not over yet and that the bank should keep rates on hold for longer.
In May, Governor Andrew Bailey said monetary policy would remain tight even with a rate cut. The Bank of England has kept the interest rate at its highest level in decades, 5.25%, since August 2023.
Labour market tightness and spiralling wage growth may keep inflation stable, although June’s monthly CPI cooled to the bank’s target level of 2%. The Bank of England is likely to keep inflation stable. a restrictive policy until it is more confident of a sustainable reduction in inflation.
The pound may continue to come under upward pressure from external factors, primarily the impact of the US Federal Reserve’s (Fed) interest rate decisions.
On Tuesday, Fed Chairman Jerome Powellindicated in his appearance before the Senate that keeping rates high for too long could “unduly weaken economic activity and employment.”
This pessimistic rhetoric will likely weaken the US dollar, which will boost other currencies, including the British pound.
On the other hand, the pound could also extend its gains against the euro due to the contrasting political landscape. The French elections have generated growing uncertainty about the country’s financial security, and its impact could spread to the entire eurozone.
As a result, the European Central Bank (ECB) may have to continue cutting rates and maintain an accommodative monetary policy for its member countries in the midst of the political nervousness.
This could widen the spread between government bond yields in the two regions, putting upward pressure on the pound against the euro. The pair has been trading between 1.1760 and 1.19 since June, the highest range for the exchange rate since August 2022.
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