04.07.202417:57 Forex Analysis & Reviews: GBP/USD. Pound and elections

In the UK, parliamentary elections are being held today. Typically, political events of such magnitude impact the national currency. For example, the euro significantly fell across the market after Emmanuel Macron dissolved the French parliament and called for snap elections. Traders reacted negatively to this decision. This is the same reason the single currency rose when it became clear after the first round that Le Pen's party might not secure an absolute majority in parliament (the outcome will be known on July 7, when the second round takes place).

Unlike the euro, the pound is reacting quite calmly to "its" elections. Although the UK's political landscape may change significantly, with Labour potentially coming to power for the first time in 14 years, the pound remains stable. The British are deeply dissatisfied with the Conservatives over wage growth rates, healthcare, prices, housing, quality of public services, and so on.

A brief overview: The House of Commons is the only elected chamber of the British parliament. It consists of 650 seats: 543 in England, 57 in Scotland, 32 in Wales, and 18 in Northern Ireland. A political party needs 326 seats for a two-vote majority, 327 seats for a four-vote majority, and so on.

All polls unanimously predict a Labour victory, potentially surpassing Tony Blair's victory 27 years ago. Labour is expected to secure more than 400 seats in parliament, allowing them to form an absolute majority without needing political alliances. The Conservatives, in turn, may receive no more than a hundred seats in the House of Commons. For the first time in history, they could lose the status of "Her Majesty's Opposition," with the Liberal Democrats taking that niche.

Given these preliminary electoral scenarios, Labour will undoubtedly come to power in the UK. They will appoint their Prime Minister, the 61-year-old former Attorney General Keir Starmer.

Why is the pound reacting so calmly to the upcoming political changes? First, because the election results are predetermined. Second, the Bank of England, by its assurances, is not subject to political influence – Labour's victory will have no consequences in this context. There's an opinion that the Bank of England intentionally did not cut rates at its June meeting to avoid favoring any election participants. However, this is more speculation, though there's some logic to it. Nonetheless, the Bank of England will focus on key macroeconomic indicators at its next meeting in August, not political changes. Most experts believe the central bank will cut rates unless June inflation, which will be known this month, sharply accelerates.

Regarding possible actions by Labour in power, there's no specific agenda that would "worry" the British currency. The nearly-prime minister, Keir Starmer, recently admitted he doesn't have a "magic wand" to quickly fix the country's economic situation. He promised not to raise taxes and to improve relations with the European Union but also noted that a return to previous economic growth rates and free trade with the EU is not foreseen in the near future.

Therefore, the pound is not "afraid" of the elections despite the potential change in the ruling party for the first time in 14 years. Although British and foreign observers are warning about Labour's lack of experience (the last time the party was in power was 2010), this doesn't concern market participants.

All this indicates that the pound will react calmly to exit polls and the official election results, which will be known tomorrow. The British currency will follow the dollar, so all GBP/USD traders' attention will be on the Nonfarm Payrolls release. This macroeconomic report will determine the price movement vector in the medium term. The dollar is currently under significant pressure due to declining ISM indices (both in the manufacturing and services sectors) and a weak ADP report, which "forecasts" weak Nonfarm Payrolls. Therefore, Friday's release could either confirm investors' fears or dispel them. The reaction of the US dollar (and, consequently, GBP/USD) will be accordingly.

In other words, the GBP/USD pair is on the verge of an important test. Nonfarm Payrolls will surely provoke significant volatility across all dollar pairs. In contrast, the parliamentary elections in the UK are unlikely to stir the pair: the results are predetermined and already priced in.