LONDON: Fallout from an electoral humiliation for British Prime Minister David Cameron’s party on Friday may prove to be another drag on the value of sterling against the dollar.
In the short term, the symbolic victory for Britain’s Liberal Democrats, the junior partners in the UK’s Conservative-led government, may help sustain that coalition.
Arguably that could be seen as supportive for sterling as there would be at least be continuity in government.
However, perhaps the more important point for investors is that the party that came second at the election in Eastleigh was the anti-European Union UK Independence Party (UKIP).
In essence, UKIP bled away enough votes from the major parties to derail the hopes of Cameron’s Conservative Party but not enough to deny the Liberal Democrats victory.
The risk of Britain one day even leaving the EU has long been flagged as one of numerous reasons to be wary of sterling. On Friday, data showing a shock contraction in manufacturing in February took its toll, pushing the pound down to a 2-1/2 year
low against the dollar of $ 1.5012.
But political risk may now become more prominent in traders’ thinking.
Both the Conservatives and the centre-left Labour Party, the two biggest parties, will be reflecting on how best to respond to the apparent rise of UKIP with its anti-EU message.
Cameron is already committed to an “in or out” referendum on British membership of the EU, which would be held by the end of 2017 — provided the Conservatives won a mandate to rule at the next national election due in 2015.
The risk now is that if UKIP is stealing Cameron’s party’s votes, the Conservatives might be tempted to steal the anti-EU party’s clothes, and become more overtly anti-Brussels.
The risk is also that the Labour Party might sense the momentum for a referendum is becoming unstoppable, and so rein back its opposition to the idea.
After all, it was a Labour prime minister, Harold Wilson, who called the last referendum on British membership of what was then called the European Economic Community back in 1975.
Only a third of Britons would vote to stay in the European Union in a proposed referendum, a poll showed on Feb 18.
None of this can be comforting for potential investors in sterling who will not welcome uncertainty over the issue of Britain’s position in the EU.
Such concern could find expression through a lower sterling/dollar exchange rate given that political uncertainties in Italy scarcely make the euro an enticing investment destination at the moment.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.