Cart: $0.00 - (0 items )

If the pound could, would it vote Conservative?

If the pound could vote, would it vote Conservative?

In past UK general election campaigns, the pound has risen when the Tories have been doing well in the polls and looked on course to win a big majority.

Since Theresa May called a snap election on April 18, her party’s poll lead has strengthened and sterling has risen 2.9 per cent to just below $1.30.

There are Brexit-related reasons for the rise, mainly the receding prospect of an election in 2020, the year after Britain leaves the EU.

If there had been an election that year, Mrs May could have hardened her position on Brexit, so as not to go to the polls with an unpopular deal.

But Britain’s EU exit aside, Simon Derrick of BNY Mellon bank said that there did appear to be a correlation between the pound’s fortunes and Conservative polling before elections. “Sterling tends to put in an improved performance when the Conservative party does relatively well in opinion polls,” he said.

And when Tony Blair looked poised to beat John Major soundly in the 1997 campaign, the pound rose when the polls showed that Labour’s sizeable lead was shrinking.

One argument goes that sterling has risen recently because investors like the idea that a bigger Conservative majority would allow the prime minister to override Brexit dissenters in her party.

Although the gap between Labour and the Tories may be wide now — the difference is 31 to 48 per cent according to the FT’s poll of polls — any narrowing before June 8 “could be a little sterling negative”, Mr Derrick said.

Yet while the pound may approve of the prospect of a Conservative government, an actual victory rarely keeps it happy for long.

When an election is over, other factors quickly reassert themselves. In this case, the obvious one is Brexit and the deal that the UK and EU eventually reach.

Sterling was buoyant throughout the 1983 campaign, which resulted in Margaret Thatcher trouncing Labour under Michael Foot, but it then fell for two years, primarily because of the dollar’s long rally.

“Sterling’s performance in the run-up to an election doesn’t reflect what happens to it afterwards,” Mr Derrick said.

So a large majority for Mrs May is no guarantee that the pound will continue its recent rally against the dollar, said Kamal Sharma at Bank of America Merrill Lynch.

Investors might therefore conclude that sterling will stay strong during the rest of the campaign, particularly if Mrs May’s victory continues to look assured, but then dip on the morning of the result and in the week after the election.

The only significant rise in sterling volatility in recent election periods was in 2010 — and it was caused by the Liberal Democrats.

When Nick Clegg, Lib Dem leader at the time, put in an impressive performance in the first televised debate, all talk was suddenly of a coalition government. The pound fell 8 cents against the dollar between then and election day.

Otherwise, said Mr Derrick, “sterling tends to [move] in a smooth, orderly fashion or in a composed range [in the run-up to polling day], as if the market was waiting for the outcome”.