Investing.com -- On Tuesday, UK Prime Minister Rishi Sunak caught political observers off guard by announcing that the UK general election will take place on July 4, deviating from the widely anticipated autumn schedule. Despite this unexpected development, the British pound experienced minimal impact, with the GBP/USD 2-month implied volatility showing a modest increase of around 20 basis points, settling at 6.20, still relatively subdued compared to April figures.
The market's tepid response to the election news seems to reflect a confidence in the current opinion polls, which show the Labour Party leading significantly over the incumbent Conservative Party. This lead suggests that Labour, under Keir Starmer, could potentially form a government even without an absolute parliamentary majority. Unlike previous years, current UK political events such as trade relations with the EU, unfinanced budget expenditures, and the Scottish referendum present only marginal risks, according to market observers.
As the short campaign period commences, there is a possibility that sterling might react to pre-election promises from the Labour leadership, barring any major polling shifts favoring the Conservatives. Nonetheless, such movements are expected to be minor fluctuations within the broader trajectory of the pound, which is primarily influenced by domestic economic data, the Bank of England's (BoE) monetary policy, and expectations for the US Federal Reserve.
From a market standpoint, the recent surprise in UK services inflation was deemed more significant than the election announcement. Following the inflation data, the market has adjusted its expectations, now pricing in a mere 12 basis points of easing by August, down from the pre-consumer price index prediction of 25 basis points, and only 37 basis points by the end of the year. Market analysts maintain a bullish outlook on EUR/GBP, despite the pair nearing the crucial 0.8500 support level, and see no need to alter their forecasts based on the UK's election timetable.
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