The unexpected UK general election result on May 7 removed much political uncertainty and saw sterling surge, as the FTSE 250 share index reached an all-time high. This promises to provide a period of stability for UK corporates and their treasury departments.
However, with a referendum on Britain’s European Union (EU) membership on the horizon, and the potential for an increasingly fractious relationship between England and Scotland, the currency will be tested against a number of tough challenges yet, warns Philippe Gelis, chief executive officer (CEO) and co-founder of foreign exchange (FX) service provider Kantox.
“The Conservative party’s unexpected victory returning the party to a majority in the House of Commons strengthened the pound, rising from a pre-election 1.34 against the euro before the election, to 1.40 this week,” says Gelis.
“But this period of sterling strength is far from certain of lasting. The outlook for the pound is actually quite uncertain – the currency will face a number of big challenges over the next few years.
“First, David Cameron is reportedly aiming to bring forward the referendum on EU membership to next year. A ‘Brexit’ would send shockwaves through the country, the currency markets and Europe.
Second, the almost whitewash victory for the Scottish National Party (SNP), winning 56 out of a possible 59 seats in Scotland, will possibly see the Union’s resolve tested like never before.
“A second referendum on Scottish independence is not out of the question, and, should the Conservative government fail to sufficiently accommodate the SNP’s anti-austerity mandate, which is contrarian to the current Conservative policy, we could see a chasm opening up further between Scotland and England, which would drive exchange rate volatility for the pound.
“Third, the UK economy’s recovery is still tentative. The country is not out of the woods yet, with growth at low levels and interest rates kept at 0.5% by the Bank of England.
“The Conservative triumph helped the pound to its biggest one-day gain against the euro for two years, but it won’t be long before the currency is tested against a number of tough challenges. Choppy waters lie ahead.”
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