The pound was broadly stable on the interbank market versus the euro this week, although it weakened versus other major counterparts like the US and Australian dollars.
In part, this is because the UK’s political parties began to campaign, ahead of the December 12th election. It’s thought that this is one of the most unpredictable UK elections in recent history and whoever wins may finally pass their form of Brexit.
Elsewhere, UK economic data was disappointing this week, with the services, manufacturing and construction sectors all shrinking or stagnating.
Meanwhile, the Bank of England (BoE) held interest rates at 0.75%, as forecast. However, two of the central bank’s nine-person committee surprisingly voted to cut borrowing costs. In addition, the BoE lowered its economic growth outlook, which caused sterling to slide against the major currencies initially before rebounding slightly.
The British public will go to the ballot boxes on Thursday 12th December. Whichever party wins will approve both their version of Brexit as well as pursue the UK’s domestic agenda, such as education, health and transport.
According to the latest Opinium poll, Prime Minister Boris Johnson’s Conservative Party stands at 42%. This is well ahead of Labour’s 26%, the Liberal Democrats’ 18%, and the Brexit Party’s 9%.
Traditionally, when the leading political party has a 10% lead in the polls this has secured them a majority in Parliament. These early polls predict well for Mr. Johnson, although clearly, we’ll see how opinions shift in the coming weeks.
However, it should be noted that in spite of the Tories’ poll lead, it’s thought that the result of this election is particularly up-in-the-air. This is because British voters are now more willing than in recent history to switch votes, to different political parties.
For instance, according to a recent ICM survey, more than 10% of people who voted for the Conservatives and Labour at the 2017 election now favour the Liberal Democrats and Brexit Party.
Under the UK’s ‘first past the post’ political system, and especially in swing seats, where the winning MP has just a small majority, this could lead to unexpected electoral results. This uncertainty has weakened sterling as a result.
Turning to the UK economy, it’s been a downbeat week. According to watchdog IHS Markit’s PMIs (Purchasing Managers Indices) for October, Britain’s manufacturing and construction sectors continue to contract rapidly.
Meanwhile, the UK’s dominant services sector reached just 50.0, exactly the figure that separates economic growth from contraction, thus signalling stagnation. This could suggest that the Brexit uncertainty, as well as the US/China trade war, are now slowing the UK’s economic momentum.
Meanwhile, although the Bank of England kept interest rates at 0.75% this week, both Michael Saunders and Jonathan Haskel voted to cut borrowing costs. Also, the BoE predicted that UK growth will by 1% lower by 2022 than previously forecast, owing to Brexit. The pound fell lower after the emergence of the BoE’s downgraded forecasts and interest rate decision.
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