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STERLING: A POLITICAL PINBALL

There have been five Labour Prime Ministers since World War II, covering eight “red” Governments with half of those stemming from the Blair/Brown era. Betting markets and the opinion polls suggest it is a near-certainty that Sir Keir Starmer will soon become the sixth.

However, if recent political events are anything to go by, the result will be a lot closer than expected. If so, this is likely to cause volatility in foreign exchange markets as we head towards 4^th July; sterling tends to bear the brunt of investor uncertainty, much more so than the UK equity and bond markets.

Assuming the bookies and polls are correct, the downside for the pound appears limited. It is already trading around a generational low and a putative Labour administration will be aware that any attempts to further expand the yawning fiscal deficit will be frowned upon by the gilt market.

That said, even a convincing Labour victory is unlikely to spark a sustained rally, given the sluggish economic backdrop and the Bank of England’s desire to start cutting rates later this year.

In short, brace for some volatility in sterling over the coming weeks, but the election is unlikely to spark a major longer-term move.