On July 4, Britons will be voting in a general election that could potentially end 14 years of Conservative rule. The Labour Party is currently leading in the opinion polls, with Nigel Farage’s Reform UK also making gains in some recent surveys. It is projected that the Labour Party could win over 400 seats in Parliament.
If the Labour Party emerges victorious, it could have implications for the economy, the Bank of England, and the pound. The Conservatives have been focusing on tax cuts to stimulate economic growth, while Labour is positioning itself as the party of fiscal responsibility. Although Labour has promised not to raise income tax, national insurance, or corporation tax, they have left open the possibility of increasing other taxes. They also emphasize the need for companies to contribute more to government funds for economic growth.
A Labour victory could lead to a delay in potential economic growth as the corporate mechanism is implemented. This delay could keep inflation near the Bank of England’s target of 2% and prompt policymakers to start cutting interest rates sooner and more aggressively. The Bank of England recently kept interest rates unchanged, but hinted at a possible rate cut in August, with a 50% probability. A Labour win could increase the likelihood of a rate cut and influence investors to anticipate further rate cuts by the end of the year.
While the pound may initially benefit from a Labour victory due to expectations of political stability and improved relations with the European Union, the prospect of more rate cuts by the Bank of England could have a negative impact in the long run. The pound’s reaction to a Labour win may not be significant, as this outcome is already anticipated. If the pound is expected to decline after the election due to increased rate cut bets, it could lose ground against currencies like the Australian dollar.
From a technical perspective, the pound/aussie pair has been in a downtrend, with a recent recovery phase stalling at resistance levels. If the pair fails to break above key levels, it could continue its downward trajectory towards support zones. For a shift in the outlook, the bulls would need to overcome certain resistance levels convincingly.
Overall, a Labour victory in the UK general election could have mixed implications for the economy, the Bank of England, and the pound. While initial reactions may be positive, the long-term impact will depend on how the new government navigates economic challenges and implements policy changes. Investors will be closely watching developments post-election to assess the direction of the pound and other financial markets.