How willl the UK and US elections impact currencies?

>> Is it time to buy sterling?

We can think of a number of ways in which the two elections are polar opposites. The first, and perhaps most obvious, is that the UK election outcome is easy to call while the US result is next-to-impossible to predict. UK opinion polls put the opposition Labour Party 20-points or more ahead, meaning the only real question is the size of the majority.

In the US, Trump has a slight lead over Biden nationally and in most of the key swing states but the margin is small and a lot can change between now and the election. In the end, the US election may be decided by just tens of thousands of voters in these swing states.

A second key difference is that the UK will swing to the left if Labour wins and to the right (populist) if Trump is victorious. Of course, many will dispute the idea that there is much of a swing at all, particularly in the UK as labour has had to shift towards the centre ground to avoid the mauling it received in the 2019 election.

A third difference reflects the more radical agenda proposed by Trump which includes tax cuts and across-the-board tariffs, compared to Labour which appears hamstrung on the fiscal front and more, not less, accommodating on trade. However, while Trump might have a more radical agenda the fourth difference between the two is important as Labour will likely have a lot of power to push its policies through, given a sizeable Common’s majority, while the new US President could easily be faced with minorities in Congress and so wield relatively limit ed powers in areas such as taxation.

This brings us on to the fifth, and probably the most notable difference, which is that the Labour Party is pledging fiscal responsibility, with continued oversight by the Office for Budget Responsibility (OBR) while the new US President has no such budget watchdog to caution against injudicious fiscal policy. Policy towards Ukraine funding could change should Trump gain office and that might not only impact UK politics, the economy, and asset prices, but the rest of Europe as well if it helps usher in a Russian victory. In contrast, there’s little sense that an incoming Labour government would change the UK’s commitment to Ukraine.

If you put all this together it looks as if there’s an argument that an incoming UK Labour government will have strong parliamentary scope to be bold but will be prevented from doing so by fiscal constraints, while a Trump win in the US would see big ideas but potentially far less power to implement them given the make-up of Congress. Quite clearly, both could try to circumvent these constraints.

>> What will be beneficial for the pound?

For instance, in the UK, there’s been speculation that a Labour government could try to alter the way that the Bank of England records ‘losses’ on its gilt holdings as it trims its balance sheet. These represent a significant ‘loss’ to the government in the coming years but many other central banks, not least the Fed, record the ‘losses’ as a ‘deferred asset’ until such times as the ‘losses’ are negated by the natural profit-making seigniorage operations of the bank. An adjustment to this sort of system in the UK could free up fiscal space in the UK.

In the US, a Trump administration could be denied tax-cutting ability by a Democrat-led Senate after the election, but trade policy, such as tariffs circumvents Congress. So here are just two ways that new leaders in the US and UK could deliver more radical policies. But which would be more likely to deliver currency strength over the parliamentary or presidential term? Steve Barrow, Head of Standard Bank G10 Strategy said the uncertainty of the outcome and the more radical nature of the initial policy offering likely puts the US dollar out in front in the short-term, should Trump win. But over the full term (5 years in the UK and 4-years in the US), he would err towards a stronger pound with a rise up to the 1.40-1.50 region.