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British Pound Threatened on Uncertain UK Election Outcome

Saturday, 01 May 2010 04:02 GMT

by  Ilya Spivak, Sr. Currency Strategist


British Pound Threatened on Uncertain UK Election Outcome

Fundamental Forecast for British Pound: Neutral

- UK House Prices Rise Least in Three Months, Says Hometrack
- British Pound Retreats as Home Loans Fall Short of Expectations
- Speculative Sentiment Points to British Pound Losses Ahead

The British Pound may see an early boost from a final Greek bailout agreement but the currency looks decidedly vulnerable ahead of Thursday’s UK general election as traders fret about the future of fiscal policy amid uncertainty at the polls.

The third televised contest between the candidates to take up the post of UK prime minister after Thursday’s general election has come and gone, and while this final round was broadly given to the Conservatives’ David Cameron, the clear winner of the UK’s first experiment with such debate was clearly the Liberal Democrats’ Nick Clegg. The charismatic leader managed to pull his party out of the shadow of its larger competitors and make the election a true three-horse race, meaning the seemingly inevitable downfall of current Labour PM Gordon Brown will not translate into a Tory victory by default. Indeed, the Lib Dems are all but tied with the Conservatives in the latest opinion polls, hinting the election may produce the first hung parliament since 1974 as neither party is able to secure a clear majority.

On balance, this is an ominous prospect for the British Pound. Markets prefer a Conservative victory, hoping Mr Cameron and company will make good on their promise to aggressively tackle the UK’s soaring budget deficit. The Lib Dems have not inspired such confidence, offering precious little in the way of details on how they would proceed on the matter. In any case, they too can’t hope for an outright majority and the prospect of a divided government incapable of charting a clear course for fiscal policy may prove bad enough to send Sterling lower in the election’s aftermath.

Elsewhere, the economic calendar seems relatively uneventful but risk sentiment may prove to be a factor early in the week, giving the Pound a boost if EU policymakers announce a finalized and expanded Greek bailout as expected over the weekend. Indeed, 21-day percent-change correlation studies between GBPUSD and the MSCI World Stock Index return a value of 0.88, the highest in nearly three months.

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