by NGOC ANH 06/06/2024, 11:34

Political stability to aid sterling

For major advanced democratic nations like the UK, political stability should be better for the pound than instability.

Political stability should be better for the pound than instability.

>> Is it time to buy sterling?

It stands to reason that political instability harms currencies. The weakness of the rand since the ANC lost its majority in the recent election is a testament to that. By implication, political stability should benefit currencies. Of course, there are many caveats here. Political stability might, for instance, mean the pursuit of ‘bad’ policy by an unassailable dictator, and that’s not likely to be supportive of a currency.

But if we think of major advanced democratic nations, like the UK, then political stability should be better for the pound than instability. And that’s what we are likely to get as the country (most probably) transitions from a Conservative government to a Labour government on July 4th.

Some might argue that the policies that Labour will pursue are less conducive to sterling strength than those undertaken by the Conservatives. But many analysts would not agree with this, and, besides, Labour has been forced into the center by its disastrous showing in the last election when it lurched to the left under former Labour leader Jeremy Corbyn.

Right now, there’s not much distance between Conservative and Labour policies, and, in the Standard Bank's view, that puts the issue of political stability higher up the scale when it comes to future sterling strength. For whatever might be said of the success or failure of Conservative policies since they won (with the help of the Liberals) back in 2010, there is absolutely no doubt that it has been a hugely unstable political environment.

The Party has had its fifth leader and PM since that election in 2010, with the shortest tenure, that of Liz Truss, lasting a mere 44 days. The five PMs during fourteen years of Conservative rule contrast starkly with just the two PMs (Blair and Brown) that led the country in the prior thirteen years of Labour Party rule. And it is not as if changes in Conservative leaders have meant the continuation of the same policies. The very brief tenure of former PM Truss in 2022 showed quite clearly that new Conservative leaders can tear up the conventional economic policy playbook (albeit only for as long as the markets will allow).

Issues of economic doctrine and, of course, the whole Brexit issue have torn the Conservative Party apart to the point where it will be crushed in the upcoming election, perhaps even being in danger of slipping to the third largest party in parliament. Could the return of Brexit-championing maverick Nigel Farage as the new Reform Party leader and candidate for Clacton add to political instability, as some might suggest? No, it probably does the opposite by gifting Labour even more seats and solidifying a majority, which already looks as if it could top 200 seats.

>> What will be beneficial for the pound?

Should Labour win by this many, it would surpass the 179-seat majority that the former Labour government first won with in 1997 under Tony Blair. The decimation of the Conservatives at that time was sufficient to ensure that Labour went on to win two more elections, and we would not be at all surprised if the same happens now.

Interestingly, that transition in 1997 to a'stable’ Labour government came with a rally in the pound that began in the months before the election and continued well after. It meant that just about the whole of the Labour Party’s time in office, from 1997 to 2010, saw a firm pound, with only the global financial crisis of 2008 undermining sterling as it suffered along with all other currencies against the US dollar.

In contrast, the subsequent period of Conservative rule has seen sterling suffer largely from the self-inflicted will of the Brexit referendum in 2016, which, as we all know, was down to Conservative infighting.

The bottom line is that years of Conservative-led political upheaval should give way to a period of Labour-led stability. That alone won’t make the pound rise. But it will provide a more solid platform from which the pound can rally if the right policies are pursued.