The GBP has been trading at a ‘political premium’ ahead of the elections due to expectations of political stability.
Polls indicate a decisive win for Labour, which is expected to form a majority government. This is seen as a positive development for political stability.
FX investors hope that political stability, coupled with growing real incomes and potential BoE monetary easing, will foster economic recovery.
Labour’s focus on supply-side reforms to stimulate private investment in housing and green industries, and a closer relationship with the EU, are expected to support economic growth.
The immediate impact of the election on GBP might be muted, but a Labour victory could lead to a more meaningful boost over the next 6-12 months..
The GBP has surged against the EUR and held its ground against the USD, reflecting investor hopes for stability and growth.
The GBP’s current resilience suggests that some of these expectations are already priced in.

Personally I think risk premiums for Sterling is too low right now heading into the election with parties like Reform UK seeing a decent boost higher in voting intentions.

With that in mind, assuming CA is right and a lot of the expected ‘political stability’ is already priced into Sterling, it’s tough to see a path of least resistance that isn’t tilted lower from here for the Pound.

This article was written by Arno V Venter at www.forexlive.com.