GBP was the best performing major currency in April despite lingering uncertainty ahead of the 7 May general elections. It will be wrong to assume that the FX market has fully priced in the impact of a hung parliament, however.
The latest polls continue to point at inconclusive elections, likely to result in a (doubly) hung parliament. Under this outcome, the party with the most seats will get a chance to form a coalition first.
-The FX markets could welcome a Conservatives win especially if their current partners – the Liberal Democrats – get a sufficient number of seats to preserve the status quo.
--At the same time, GBP could weaken in response to a Labour win, given lingering fears about another Scottish independence referendum.
---Investors should also prepare for a potentially protracted coalition building process.
Indeed, with the economy doing well and external threats from the Eurozone subsiding, there is no pressure on the parties to form a government quickly as was the case in 2010.
The GBP’s resilience should be put to the test in the run up to the elections and even extend into renewed weakness across the board if the political status quo changes.
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