As anticipated, the UK election had minimal impact on the markets. The Labour Party secured a significant victory, poised for a substantial parliamentary majority. However, UK bonds and the British pound remained steady, as opinion polls had shown little change since the election was called six weeks ago.
What's next? Investors will shift their attention back to interest rates, which will ultimately influence the pound's direction in the coming weeks and months.
For the next five years, Labour will govern with its largest majority (170 seats) since 1997, according to the 10pm exit poll. Votes are still being counted, but Keir Starmer's party reached the crucial 326 seats for a House of Commons majority just before 5am this morning and is projected to win 410 seats, compared to the Conservatives' 131. The Liberal Democrats are expected to secure 61 seats, and Reform UK 13, indicating that the Conservative vote was squeezed nationwide. This could present a challenge for Labour, which will need to address the rise of the hard right, a trend seen across Europe.
Labour has expressed its intent to strengthen trade relations between the UK and the EU, potentially leading to a partial reduction of the pound's Brexit premium. However, any enthusiasm for the currency will be cautious, given that the new ruling party has ruled out rejoining the single market or customs union. Indeed, a modest decline in sterling over the next week would not be surprising, as GBP/USD has historically fallen around 1% following a general election. However, today's US jobs report could disrupt this trend if it shows weak results.
Some investors believe UK assets, including the pound, might offer refuge in the coming months from political instability in countries like France and the US. Nonetheless, attention remains on macroeconomic data and the monetary policy outlook. We expect more easing from the Bank of England than the market predicts (45 basis points) this year, starting with a cut in August. This could keep GBP/USD below $1.30 for a while, while GBP/EUR is likely to stay relatively stable, barring any upheaval from the French election this weekend.
