The pound rose on Friday after reports that the Labour Party had won a landslide election victory. With the election campaign over, traders will be focusing on Labour’s economic policies and the Bank of England’s next moves.
The UK stock market’s major indexes had a limited reaction to the election results, reflecting the fact that many traders believed the polls and expected a landslide victory for the Labour Party. The UK housing sector was expected to be an early beneficiary of an election victory, with blue-chip housebuilders all seeing early gains.
A Labour victory seemed well priced in and not too scary for the markets.
Election win sends pound rallying
In the near term, expected rate cuts by the Bank of England are expected to play a key role in shaping the trajectory of sterling and gilt yields as they approach their summer peak. The premium of gilts over the heavily battered German bund market, which has remained stable so far this year, may fall as greater clarity emerges from Britain’s political leadership.
Expected political turmoil in France and the US later this year is likely to cause further volatility in the US dollar market. For the UK, much will depend on the Labour government’s first 100 days in power, including the budget due in mid-September.
With another election coming up in France this weekend, analysts are optimistic about how the pound will perform against the euro in the short term. Starmer’s appointment could restore confidence in sterling assets and encourage further buying of the currency in the coming days.
The first 100 days will be crucial for Labour and markets
Labour campaigned on a promise not to raise income tax, national insurance or VAT despite its big spending plans, leaving the new government with only around £20 billion in fiscal room under current budget rules. Analysts remain sceptical that the government can meet its 2.5% GDP target. If Chancellor Keir Starmer and his team fail to meet this target, further fiscal tightening may be necessary.
“The question is how bold a move Starmer will make?” Neil WilsonJohn McCain, chief market analyst at Finalt, said: “When it comes to economic policy, will it be a ‘go steady’ approach to avoid scaring the horses, or will there be internal pressure to borrow more later, or will it be a bold, daring move in its first 100 days? It’s fair to say the new Treasury Secretary will blame his predecessor and do the usual hand-wringing.”
Investors buy gold ahead of expected capital gains tax hike
The election has led to increased gold buying in the run up to the vote. The Pure Gold Company reports a 43% increase in physical purchases of gold coins and bullion by Brits in the past seven days. Many are selling other assets such as artwork, cars and even homes to buy gold in anticipation of higher capital gains tax. British gold coins minted by the Royal Mint are exempt from both capital gains tax and VAT (subject to personal circumstances).
“Labour’s decisive victory has brought stability to the UK political and economic outlook and the pound has already strengthened slightly since then, making gold cheaper per dollar,” said Josh Sohl, CEO of Pure Gold Company. “Some of our property developer clients have chosen to sell their properties now to avoid higher capital gains tax, take advantage of more favourable gold prices and enjoy the tax benefits of owning gold.”
