Is sterling in for a difficult few months?
Over the last couple of days we have seen suggestions in the marketplace that the forthcoming general election could result in a hung parliament in a worst-case scenario. Despite being well ahead in the polls for some time, the Conservative party received a bitter blow over the weekend with a new poll suggesting the party's lead over Labour was down to 2 points. As we covered in one of our earlier articles, a hung parliament is a nightmare scenario for the investment markets with neither of the major parties able to push through any of their major economic policies without assistance from peripheral political groups.
As a consequence we have seen sterling come under significant selling pressure as investors look elsewhere for the safety factor. While a reduced exchange rate will assist the UK export market, and ultimately help the economy, it could attract a new bout of inflation with imported goods more expensive. This is something of a double edge sword because the economy needs a boost but we also need to address the problem of inflation, after spiking from 2.9% to 3.5% between December and January, which could if left unattended scupper the UK economic revival.
All eyes will be on the currency markets in the coming weeks and months and while the Conservative party is still the favourite to take the lion's share of the vote the situation is closer than many people had anticipated!
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