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Is the general election taking its toll on sterling?

When Theresa May called the snap general election in late-April, the Conservative’s had a 21 point lead ahead of Labour, and May was on course for a landslide victory not seen since the Thatcher era.

Lifted by the prospect of certainty after a year of surprise geopolitical shifts, the pound rose around 3% in response.

Fast forward to today and Labour has closed that spread to just five points and Jeremy Corbyn is enjoying the smallest gap since he was elected leader in 2015¹.

Polls and the pound

The market’s early confidence has taken a hit and sterling, which has slipped 0.5% against the dollar, is on course for its worst week since early April. The pound’s sitting at an 11-week low compared to the euro.

Polls should always be taken with a pinch of salt, but with the Conservative’s clear lead unwinding, the chance of a hung parliament – thus more uncertainty – has increased.

This happens when no single party wins over half of the seats in parliament. In 2010, a hung parliament resulted in a coalition government being formed between the Conservatives and Liberal Democrats.  

But as the pound hands back gains from the last month, we’ve had a timely reminder that the fallout from sterling’s devaluation may only just be starting to unravel.

Consumer spending dropping

The weaker pound pushed up the price of goods in the first quarter, my weekly shop has grown more expensive in spite of my efforts to be good and leave the luxury chocolates on the shelf. This has meant that economic growth is below expectations and forecasts from the Office of National Statistics have been revised down from 0.3% to 0.2%.  In comparison, economic growth reached 0.7% in the final quarter of 2016.

This has pushed household saving measures to record lows as inflation growth is running  ahead of wages². After jumping to 2.7% in April, inflation is expected to reach around 3% by the end of this year.

Be prepared for volatility

I’m expecting the markets to be more jittery in the lead up to the general election and beyond. As Britain progresses with Brexit negotiations, we need to secure a good trade deal to remove the pound’s ceiling and lessen the squeeze on consumers.

It’s here where I’d usually stress the importance of preparing for uncertainty by taking control of your finances. But, in weeks like this, priorities change. You hug your children tighter, appreciate your loved ones and hardly think about your long-term investments at all.

1 YouGov data

2 Financial Time, UK economy slows more than expected in first quarter of 2017 

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