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    Sterling Gyrates in UK Election Suspense

     

    The British Pound sold off sharply twice and recovered as traders await the results of the British general election. The contest between the Conservative Prime Minister David Cameron and Labor opponent Ed Miliband has the potential to prompt sweeping changes in the relationship between the United Kingdom and Europe and within the U.K. itself.

    Neither candidate appears to have an edge going into today’s polling, with the next Prime Minister likely to be determined by the results for three smaller parties, the Liberal Democrats, the United Kingdom Independence Party (UKIP) and the Scottish Nationalist Party (SNP).  

    The sterling fell from 1.5251 at the London open to 1.5164 in a rapid series of declines that lasted about two hours. At the bottom the reversal was swift and the climb to 1.5238 took about half as long as the drop.  

    The U.S. market saw another rapid plunge and return from 1.5225 to 1.5168 and back to 1.5237 in the space of about two hours to 11:35 am. Liquidity was limited as many players were on the sidelines. The cable was trading at 1.52315 at 1:52 pm in New York.

    The British electorate on Thursday faces the probable and unusual result of a hung Parliament, that is, without a clear majority for either main party, Conservative or Labor. Whichever candidate is able to form a new governing coalition will be the next Prime Minister. 

    Coalition governments are rare in England. Except for the current arrangement between the Conservatives and the Liberal Democrats, the only two prior coalition governments in the last 150 years were during the two world wars of the 20th century.

    Coalitions, at least in formation, tend to give fringe political views greater weight in government and thereby lies the risk for the sterling and British markets. 

    The likely coalition parties are the Scottish Nationalists, the anti-EU or euro-skeptic UKIP, and the current government partner, the Liberal Democrats. 

    The Scottish Nationalists are mainstream social democrats and aside from their focus on Scottish nationalism are unlikely to challenge the governing consensus on British membership in the European Union or to advocate joining the euro.  

    The SNP lost a referendum on Scottish independence last year. While a campaign for Scottish independence from the U.K. would be an enormous negative for the British economy and the sterling, the SNP and their leader Nicola Sturgeon will probably downplay their independent bent, at least for the time being, if they join or support a governing coalition with Labor.

    The UKIP is a different story. They garnered the fourth most votes in the 2010 elections and won the highest share of any party in the 2014 European Parliament elections.  They advocate leaving the European Union and much greater separation from continental affairs. A strong showing for them and their leader Nigel Farage let alone consideration or inclusion in government would send shockwaves throughout the European political and financial establishments.

    Neither Labor nor Conservative is likely to substantially change the economic policies of the current government which have produced among the the best post-recession records in Europe. 

    Economic crisis have a way of dispensing with old political arrangement and fomenting the new. The British election is just the latest political fallout of the 2008 financial collapse and the European debt crisis.

     

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

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