8 July 2024
The UK's Labour Party, led by Keir Starmer, has won a commanding majority in the general election, ending a 14-year stretch of Conservative rule. The Labour Party has won 412 seats (a big increase on the 203 it won in 2019) in the 650-seat House of Commons, and the Conservative Party 121 (down from 365 in 2019). This came as no surprise to the markets, which have been sanguine about the widely anticipated result throughout the campaign period.
The GBP was little changed. As the UK’s growth outlook is sluggish, with limited fiscal room, this means the GBP is still likely to be driven more by the Bank of England’s (BoE) monetary policy outlook versus other central banks rather than this election. On this basis, the currency appears too strong against the USD, as compared to what its respective rate differentials imply (see the chart below).
Source: Bloomberg, HSBC
The GBP has outperformed this year, but we still see it facing a leadership challenge. The start of the BoE’s easing cycle is likely to be a catalyst for a reassessment of the GBP. Our economists expect the BoE to start cutting rates at its 1 August meeting, but the decision could be about as finely balanced as it gets. So, for now, it is all about the data. The most important releases will be June inflation (17 July) and May labour market (18 July).
We are also cognisant that the UK’s external imbalances, which are primarily plugged by ‘other investment’ inflows, remain persistent and a source of vulnerability for the GBP, especially if market volatility suddenly increases. A BoE rate cutting cycle coinciding with a sudden increase in risk aversion would be a poor combination for the GBP.
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