Sterling Rallies As Tories Win UK Election

The pound was the main winner of Friday’s Asian Session, as it rallied following the announcement of exit polls that showed Britain’s ruling conservative party winning the UK elections but probably needing the help of a junior partner to form a stable majority government. This was a positive surprise for UK assets, as many analysts were fearful of a more balanced outcome that would result in a deadlock and difficulties in forming a new government. The conservatives are also traditionally seen as more business-friendly and therefore this was a result that pleased the market.

On a more negative note, the win by Conservatives should also result in an in-out referendum on EU membership in two years; something that could create new uncertainty with respect to Britain’s political, financial and trade relationships with the rest of the EU.

The pound rose to as high as 1.5520 against the US dollar and drove EUR/GBP to as low as 0.7224. The two pairs were last trading around 1.5450 and 0.7240. The market is expected to re-focus on UK economic fundamentals and the Bank of England’s plans for interest rates now that the election is over.

In other news, the Australian dollar was not much moved after the Reserve Bank issued its quarterly monetary policy statement. The statement was perhaps on the dovish side of expectations as the bank kept its options open with respect to future rate cuts in light of a Chinese economic slowdown and weak business investment. The aussie managed to reclaim the 79 cents level to trade as high as 0.7918.

Data out of China were on the weak side as both exports and imports were much worse than expected during March and the country’s trade balance fell as a result. Weak figures out of China could result in additional stimulus from the authorities in order for the 7% growth target to be met.

Outside foreign exchange markets, oil fell, bond yields stabilized after a very volatile Thursday and stocks rose; a reversal of some major themes of the previous days. As a result the US dollar also gained.

Looking ahead, the all-important US nonfarm payrolls number for April and related employment statistics are expected to be the main reference points for the markets. The expectation is that payrolls will rebound to 225 thousand versus a disappointing 126 thousand the previous month. The unemployment rate is expected to dip to 5.4%. Strong figures are likely to support the US dollar, which has been on the receiving end of heavy selling lately as a result of mediocre economic data.