New Government and possible impacts on FX markets and the Pound

Article by Medilink Corporate Partner Abacus FX.

With the Conservative party’s 14-year reign now over and a new Labour government, led by Keir Starmer, securing a majority there are a host of potential changes on the horizon, below we divulge into the possible impacts this could have on the FX markets and the Great British Pound.

The good news for Labour, is If a party holds a majority, it means it doesn’t need to rely on other parties to pass laws, meaning the bigger the majority, the easier it is. Whilst the new PM has outlined “Changing a country is not like flicking a switch” and that changes will “take a while” the effects of a newly elected Labour government in the UK could have both short-term and medium-term implications across various aspects of the economy, financial markets, and investor sentiment.

With Labour outlining that the first priority is to “deliver economic stability” as the British public continue to face the cost of living crisis, the new Chancellor Rachel Reeves has revealed she will need to stick to “strict fiscal rules” the outgoing government already have in place.

Below we have highlighted some potential effects that could unfold in the short to medium term.

Potential short-term impact:

–  Increased GBP Volatility: In the short term, the Pound is likely to experience increased volatility as markets digest the election results and adjust to the new government’s policy announcements.

– Initial Depreciation: The Pound may face downward pressure initially due to uncertainty and concerns about potential policy changes with the new Labour government in place, particularly those related to government spending, taxation, and economic management.

Potential medium-term impact:

– Policy Clarity Impact: As the new Labour government outlines its economic agenda and policy priorities, the Pound could well stabilize or experience increased fluctuations based on market reactions to specific policy measures and their perceived impact on the economy.

Longer-Term Outlook:

As we achieve clarity on economic policies and effective implementation,  could help restore investor confidence in the medium term, potentially supporting the GBP if the government’s actions are seen as conducive to economic growth and stability.

For further information on the above or if you require any assistance with your ongoing FX requirements, please do not hesitate in reaching out to our friendly team of experts who can help guide you through a number of strategies to mitigate against exchange rate volatility. Call 020 3950 4192 or email [email protected]