How do elections in the UK, EU and US typically impact currencies?
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Typically, the pound tends to be impacted by elections if political instability is a possibility. For example, ahead of the 2019 election, the polls were predicting a Conservative majority, which boosted the pound. However, any sign of a possible hung Parliament or Labour win caused the pound to weaken, due to the prospect of a radical political change under Jeremy Corbyn.
Analysts believed that a Conservative win would ensure that the UK left the EU with a Brexit deal. Sure enough, sterling surged after the Conservatives won a clear majority.
At last year’s local and Scottish Parliamentary elections, the pound strengthened after Boris Johnson emerged stronger in Northern England and the SNP failed to achieve an outright majority. The likelihood of an imminent Scottish independence referendum decreased and so did the possibility of political instability.
The euro tends to react in a similar way to the pound when elections take place, weakening at the prospect of political instability.
Following the first round of the French Presidential election, the euro received a brief boost as Emmanuel Macron had the lead against Marine Le Pen. However, the final result was not set in stone at this point, especially as the French elections are famously unpredictable.
In the final round, Macron won by 58.54% of the votes versus Le Pen’s 41.46%. This was a lower margin than the 66% he won in 2017 and Le Pen achieved the highest ever score for the far right in a French Presidential election.
While the euro had been buoyed over the course of Sunday evening by the defeat of Marine Le Pen, it weakened following this. This was due to the fact that Macron’s victory was relatively modest and largely expected, as well as because the markets were also focused on economic worries in Europe.
In contrast to the pound and the euro, the dollar typically strengthens in times of political instability due to its status as a safe-haven currency.
During the 2020 US election, the race proved to be closer than the polls predicted, with President Trump managing to win the state of Florida, a key battleground. The dollar strengthened on this news.
However, as a Biden victory looked more and more likely, the dollar weakened against a basket of currencies. After Biden’s win, the dollar’s movements were modest, but it continued to trade at lower levels against a basket of currencies.