UK Election 2024: Impact Analysis on GBP and FTSE 100

• The UK election has had a surprisingly muted impact on the market, likely due to the focus on monetary policy.
• Polling suggests a comfortable Labour victory, but any surprises could trigger volatility in the GBP and FTSE 100.
• The direction of monetary policy, particularly potential BoE rate cuts, will likely be a more significant driver of GBP and FTSE 100 performance than the election outcome.

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UK Election Preview

As UK voters gear up to cast their ballots tomorrow, July 4, the political atmosphere is filled with anticipation. This election will shape the House of Commons and, consequently, the nation’s future trajectory. 

Below we have a brief graphic representation of the Elections and general information.

Source: AJLabs, UK Office of National Statistics, The Electoral Commission (click to enlarge)

Market Reaction Ahead of the Election

The market has been rather muted since the surprise announcement by Prime Minister Rishi Sunak which set the scene for a short and swift campaign. Surprising as it is, the markets barely flinched following the announcement and this has continued as we approach election day.

There are reasons that could be contributing to this, which we will discuss shortly. However, considering the upheaval in the UK political landscape since the Covid-19 pandemic, it is understandable that both market participants and citizens have maintained their composure.

Monetary Policy 

Several factors have contributed to the muted response, particularly the monetary policy stance of the Bank of England (BoE). At present, market participants seem more focused on the direction of monetary policy than on the election outcome. The reason behind this could hinge on the fact that Government reforms could take time to come to fruition and provide respite to an already stretched consumer. Monetary policy on the other hand could provide immediate respite if the Bank of England (BoE) follows through on rate cuts in Q3. 

Fiscal Policy to Remain Steady

In the past the Labour Party has been seen as anti-business in some quarters while their penchant for social programs has also led to concern. Given the precarious position facing the UK Government around spending, it is no surprise that both the Labour Party and Conservatives have pledged to stick by the fiscal rules in place to bring debt under control.

There is some concern here, as some of the potential plans that the Labour Party have regarding rail nationalization, infrastructure spending etc will make it difficult to abide by the existing assumptions on public expenditure moving forward. If the Labour party does move forward on these plans, it could boost growth over the medium and longer terms but could also lead to tax hikes over the medium term. Similar to monetary policy however, these considerations will not impact the consumer immediately and are more likely to factor in over the medium to longer term outlooks. 

Brexit and Scottish Referendum 

Heading into the 2019 election, two of the main concerns for market participants were the implications from Brexit as well as the issue of Scottish independence. Both of these unknowns have largely taken a backseat this time around as Brexit has been handled and the Scottish referendum appears further away now than it did in 2019.  

These factors have kept market participants at ease as the elections approach. The question is will any surprises stoke serious volatility on election day and the days that follow? Any significant deviation from polling numbers may do just that.

Election Polling

Since the Election announcement, polling has been rather consistent with the Labour party enjoying a significant lead over the Conservatives. The latest poll released yesterday by Redfield and Wilton showed the Conservative have gained 3 percentage points up to 22%, while Labour have dropped a percentage point down to 41%. This is the first time that Labour’s lead has dropped below 20 percentage points since March 10. The survey was conducted on a group of 20000 people between June 28 and July 2, 2024. 

Meanwhile, Reuters has compiled data from over 50 different polls conducted by nine polling firms throughout the election campaign. While the results are consistent, they also indicate a narrowing of the Labour Party’s lead since early June. Nevertheless, the data still suggests that Labour is on track for a comfortable victory.

Source: Reuters LSEG (click to enlarge)

Drawing Parallels to Past Elections 

In the run-up to the election, many analysts and observers have drawn comparisons between the 2024 election and those of 2019 and 1997. The 2019 election is frequently referenced as it is the most recent, but the 1997 comparison is particularly intriguing due to the similar lead (based on polling) held by the Labour Party in the days leading up to election day.

The 1997 Election

The 1997 election, which culminated in a landslide victory for Tony Blair and the Labour Party, serves as a fascinating case study. Following the election, the GBP strengthened considerably, reflecting market optimism about Labour’s economic policies. Additionally, the FTSE 100 experienced a gradual increase, signaling investor confidence over the 12 months that followed.

There are similarities but the short-term fiscal challenges facing the incoming Government may make things more difficult for the current Labour cohort compared to their 1997 counterparts. The incoming Government knows that one of the key topics of the election is the strain on public services like the NHI health services as well as the cost of rail transport. To address these issues on a tight fiscal budget is a considerable challenge and could take some time to come to fruition. 

The 2019 Election

In contrast, the 2019 election, in which Boris Johnson’s Conservatives secured a clear majority, initially caused a surge in the GBP as markets welcomed the resolution of prolonged Brexit uncertainty. This was short lived however, as the GBP surrendered those early gains with three successive losing months, particularly against the USD. However, the FTSE 100 exhibited a more cautious response due to underlying concerns about Brexit’s long-term economic impact.

The resolution of Brexit means that the primary source of volatility and uncertainty leading up to the 2019 election is no longer a concern. As a result, comparisons to 2019 hold less significance at this point.

Historical Performance of the GBP and FTSE 100: Labour Government vs Conservative Government

Research by Citi Group indicates that the MSCI UK index of large- to mid-cap stocks tends to rise by approximately 6% six months after Labour victories, whereas it generally falls by around 5% following Conservative Party wins.

The more domestically-focused FTSE 250 has generally outperformed the FTSE 100 following elections, particularly after Labour victories, according to the research. The bank also found that defensive stocks and financials tend to perform better post-elections, while energy stocks perform well regardless of the election outcome.

This is a very difficult comparison to make as actual performance can be influenced by a wide range of factors including global economic conditions, specific policies, and unforeseen events such as the Covid-Pandemic and the Global Financial Crisis in 2008.

Impact Analysis on GBP and FTSE 100: What to Expect on Election Day and Beyond

GBP/USD Impact

The GBP has enjoyed a rebound against the US Dollar just as the election day approaches. The prospect of a majority win for the Labour government could stoke some short term volatility in the GBP and lead to potential gains. 

Labour are projected to win comfortably and any surprises in the final results or as results begin trickling in could lead to outsized price swing and volatility in GBP currency pairs. Markets hate surprises and thus any deviation from the polling numbers should in theory lead to losses for the GBP against its major counterparts. The same could apply should the vote return a hung parliament. A hung parliament could negatively impact UK assets, leading to a potential selloff after the results due to market dislike for uncertainty but the resulting impact is likely to be short-lived. 

Regardless of whether Labour wins as anticipated or in an unexpected manner, I expect any fluctuations in GBP currency pairs to be rather short-lived. In summary, I believe that monetary policy will continue to be the primary driver for the GBP moving forward. Markets are pricing in August rate cut and this will be the primary focus once the election noise dies down. The election may generate volatility but the overall direction for the GBP will come from the BoE MPC decisions moving forward. 

GBP/USD Daily Chart, July 3, 2024

Source: TradingView.com (click to enlarge)

Key Levels to Monitor Heading into Election Day and Beyond.

Support

• 1.2618
• 1.2550
• 1.2500 (Psychological Level)
• 1.2300

Resistance

• 1.2750
• 1.2850
• 1.3000 (psychological level)
• 1.3250

FTSE 100 Impact

The FTSE 100 has been on a steady decline for the majority of June after topping out at around 8483 on May 15, 2024. Since, the FTSE has staircased its way lower to trade at 8175 ahead of the election, still up 5.61& YTD. 

Now, we have already discussed the research by Citi Group above which indicated that domestic stocks perform better post election, with the FTSE 250 generally outperforming the FTSE 100. Thi is even more so when the Labour party secures a victory. This does bode well for UK stocks moving forward but is not pertinent to the election day itself. 

On election day, volatility will be stoked should results start coming in that contradict the polling numbers. In such an event a short-term selloff of UK stock may materialize largely due to uncertainty. Any moves by the Government to support businesses will likely take time and thus in the short term a rate cut by the Bank of England would hold more weight in boosting UK stocks as well. A rate cut would likely stoke demand as consumers will have more disposable income to spend.

FTSE 100 H4 Chart, 3 July, 2024

Source: TradingView.com (click to enlarge)

The technical picture on the FTSE does hint at a bullish move in the coming days and weeks. On the daily chart, price has printed a double bottom pattern, while the H4 chart above, we are trading in a descending wedge pattern which usually precedes a bullish breakout. 

This however, might take some time to play out and is unlikely to be significantly influenced by the election. 

Key Levels to Monitor Heading into Election Day and Beyond.

Support

• 8117
• 8000
• 7900

Resistance

• 8210
• 8250
• 8300

Follow Zain on Twitter/X for Additional Market News and Insights @zvawda

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