Crédit Agricole on what a labour victory means for Sterling

• The GBP has been trading at a ‘political premium’ ahead of the elections due to expectations of political stability.
• Polls indicate a decisive win for Labour, which is expected to form a majority government. This is seen as a positive development for political stability.
• FX investors hope that political stability, coupled with growing real incomes and potential BoE monetary easing, will foster economic recovery.
• Labour’s focus on supply-side reforms to stimulate private investment in housing and green industries, and a closer relationship with the EU, are expected to support economic growth.
• The immediate impact of the election on GBP might be muted, but a Labour victory could lead to a more meaningful boost over the next 6-12 months..
• The GBP has surged against the EUR and held its ground against the USD, reflecting investor hopes for stability and growth.
• The GBP’s current resilience suggests that some of these expectations are already priced in.

Personally I think risk premiums for Sterling is too low right now heading into the election with parties like Reform UK seeing a decent boost higher in voting intentions.

With that in mind, assuming CA is right and a lot of the expected ‘political stability’ is already priced into Sterling, it’s tough to see a path of least resistance that isn’t tilted lower from here for the Pound.

This article was written by Arno V Venter at www.forexlive.com.