Investors across Britain are becoming increasingly cautious ahead of May's general election amid fears for the pound's future.
After the UK's 2010 general election which resulted in the first hung parliament since 1974, there was a marked reaction from financial markets. At the close of trading on results day, the situation for sterling was pretty grim:
- FTSE 100: down 2.6%
- FTSE 250: down 4.1%
- Sterling: closed down just under 3 cents against the dollar at $1.4682
- Sterling: closed down more than 1p against the euro at 86.17p.
In the current climate of wild media speculation and dramatic campaign speeches, it's almost impossible to predict what way the May elections will go. The British electorate has become largely indifferent to the democratic process in recent years, with 2010 revealing an indecisive nation from weak turnout figures.
Volatility has been a key word in foreign exchange markets so far in 2015 although the pound has performed with a great deal of strength, despite election uncertainty. However, investors are wary of speculating in sterling denominated instruments amid concerns of an impending currency nosedive.
A recent white paper published by The FX Firm states:
'From a foreign exchange perspective, the Scottish Referendum last autumn is a good indicator of what we can expect from the election. Then, as now, the result was too tight to call and the effect on sterling was dramatic. Political uncertainty will always have a certain outcome: volatility in the financial markets with the currency markets often setting the tone on this front.'
Just as it is impossible to predict the outcome of May 7th's general election, there's no way of knowing how the pound will react. For those invested in longer term sterling-denominated assets such as property, there is less to worry about. However, for short-term sterling investors the time to bail may be now, while sterling is flying high against most major currencies.
The volatility of FOREX markets is not for the faint-hearted. An investor who wishes to sleep well without the huge burden of risk is wise to stick with tangible assets such as property. There's a reason for the expression 'safe as houses' after all!