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Analysis

UK General Election:
Potential outcomes and market impact

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

Potential results

With the 4th of July general election getting close, most polling indicates a clear Labour victory. Recent polls predict a disastrous result for the governing Conservative party, with the outcome expected to be the most comprehensive defeat for any party since the 1930s. That could mean markets should have already priced in the result. However, there are no guarantees, and key markets such as GBP/USD, the FTSE100, and Gilts (UK government bonds), could all see increased volatility as results come in.

 

How low can they go?

Prime Minister Rishi Sunak took the surprise decision to call an early election, and polling numbers for the Conservatives have fallen steadily from an already low pre-announcement start. After the return of former UKIP leader Nigel Farage, to the Reform UK party, the Conservatives have lost much of their core vote, and have lost voters in all directions – to Labour, to the centrist Liberal Democrats, and right-wing challengers Reform. Although there is still time for this to change, and polling is no guarantee of the result, the eventual winner is not seriously in doubt.

 

Seat count and markets

In the British political system, there is no real difference between a 50 or 150 seat-majority, at least in terms of the functioning of government. But if the Conservative Party does perform as poorly as currently predicted, there will be only a small, fractured opposition to the next Labour government. How markets will take this is guesswork. On the one hand, a large majority gives a clear mandate, and will allow Kier Starmer’s Labour to govern the country with ease. On the other, a lack of credible opposition may be seen as a negative, with the remaining Conservatives unable to scrutinise policy effectively.

 

Reputations old and new

The Conservative Party historically had strong pro-business credentials. They are usually trusted by voters to manage the economy better than Labour, who are considered stronger in terms of social security, especially regarding the state healthcare system. That means stock markets and the GBP have sometimes responded well to Tory victories. But after the brief, turbulent premiership of former Prime Minister Liz Truss, this reputation was shaken, with major sell-offs in key markets.

What assets will be most affected?

No one can accurately predict the market response to a general election, but as results start to come in on the night of 4th July, there will be some early signs. Traders will see the first response in currency markets, which could experience volatility after the exit poll and as results come in. It’s impossible to say with certainty which way they will go – in the past, the pound has strengthened after Conservative victories, but Starmer’s relatively moderate image is soothing to markets and the near-certainty of the result means a lot of the result will already be priced in.

 

“Traders will see the first response in currency markets, which could experience volatility after the exit poll and as results come in.”

 

The next day

Forex markets run 24 hours a day, so they provide the first indication of the result. Since British elections traditionally take place on a Thursday, traders will need to wait until Friday morning to see how UK stocks react. There could be some volatility at the open, creating long and short opportunities in both UK stocks and the FTSE100 index. If the result is closer than expected, volatility may be more severe, but for this to happen there would need to be a significant change in the coming days.

 

How quickly will the new government form?

After the results are declared, the leader whichever party wins a majority will visit King Charles to be formally appointed Prime Minister. Immediately afterwards, he will return to Downing Street to receive briefings and begin governing. Since every poll gives Labour a comfortable majority, there will be no coalitions, and no negotiations between parties. Then the new Prime Minister will announce their new cabinet, assigning portfolios to ministers selected from his party. The formal handover of power is then complete.

 

Conclusion: volatility

Elections produce volatility, especially when the outcome is uncertain or when disruptive parties perform strongly. Neither of these are predicted to happen in the 2024 UK general election. That doesn’t mean markets will be calm, and traders should still be prepared for volatility. We may see sell-offs in stocks and GBP/USD. Because the EUR will be strongly affected by the upcoming French election, GBP/USD is a simpler way of gauging market reaction to the predicted Labour win. As always, traders should be careful: markets are inherently volatile, and especially after elections. Prudent risk management, position sizing, and use of stop losses will be essential for those trading in UK markets.

FAQs

How will markets be impacted by a Labour victory?

The upcoming UK General Election could significantly impact financial markets, leading to increased volatility in UK stocks, indices, bonds, and the British Pound. Historically, Conservative victories have sometimes led to rallies in stocks and sterling, but given the current polling, a Labour victory is near certain. It is not clear whether markets will welcome this development.

Is polling reliable for the UK general election?

Current polling indicates a clear victory for the Labour party, and a significant defeat for the governing Conservative party. The predicted result could be the most comprehensive defeat for any party since 1931, when the Conservative Party won 470 seats as part of a national unity government. However, while polling provides a useful indication, it is not a guarantee of the actual election outcome. Even so, there is little to no chance of another party overtaking Labour this close to the election.

How will UK election trading be affected immediately after the election?

Immediately after the election, traders can expect to see the first market responses in the currency markets, with potential volatility in the GBP/USD and EUR/GBP pairs. As the results are announced, there could be significant movements in UK stocks and the FTSE100 index when trading opens on the Friday following the election.


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