Pound Sterling Performs Weak as Snap General Election Draws Closer

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The British Pound was lenient on Friday as markets digested the results of the Brecon and Radnorshire by-election result that saw the government’s parliamentary majority cut to just one after the seat was taken off the Conservatives by the Liberal Democrats.

The prospect of a snap General Election before 2019 is out is therefore high and the political uncertainty posed by another vote is likely to keep Sterling on the back-foot.

Down over 1.5% from where it opened the week, the Pound-to-Euro exchange rate is trading at 1.0927 ahead of the weekend. The Pound-to-Dollar exchange rate has meanwhile tested fresh two-year lows over the course of the past 24 hours below 1.21 but is now back at 1.2105.

“GBP/USD remains heavy and is trading around 1.2096. News that the Liberal Democrats had won the Brecon and Radnorshire by‑election, which was previously a Tory seat, applied some downward pressure to GBP. The loss of the seat means that UK PM Johnson’s majority in the House of Commons has been reduced to just one,” says Kim Munday, a currency market strategist with CBA. “In our view, such a slim majority in House of Commons increases the risk of a No Confidence vote being taken against the government. Brexit uncertainty will continue to be the dominant driver of GBP as the current 31 October deadline looms.”

The Pound has historically underperformed its rivals ahead of General Elections and referendums owing to the uncertainty such events generate. The prospect of another vote adds to Sterling’s existing concerns surrounding a no-deal Brexit will occur on October 31.

The Government is almost certain to lose its majority if a number of Conservative MPs follow through with threats to quit the party were its leader to follow a ‘no deal’ Brexit policy.

With new Prime Minister Boris Johnson promising just that, it is little wonder that many are suggesting he could be the shortest serving British Prime Minister in history.

“Conservative MP Phillip Lee is considering a move to the Lib Dems, which if coupled with a Lib Dem win in the Brecon and Radnorshire by-election today would see the government lose its majority,” says George Brown, an economist with Investec.

Dr Phillip Lee, who supports a second EU referendum, suggested he will “spend the summer” deciding whether to resign the Conservative whip and join the Liberal Democrats.