Most analysts are wondering how the upcoming UK general elections, scheduled for December 12 this year, will affect the national currency. They seriously fear a currency crisis that could sweep the country. As a result, the British currency will be under heavy pressure and will undergo a powerful collapse.
The pound will take the brunt after the election, experts said. They remind that the sterling was influenced by political forces that undermined its position for a long time. Currently, the pound is also resisting excessive political pressure, but with varying degrees of success.
Leading economists, analyzing the current situation in the UK currency market, came to the conclusion that a currency crisis is not ruled out in the country in the near future. Llewellyn Consulting experts drew attention to a number of signs that preceded its appearance. These include the collapse of the exchange rate, the deficit of the current account and the balance of payments (that is, the difference between imports and exports), as well as the deficit of the state budget (the gap between taxes and expenses). As a rule, this difference exceeds 4% of GDP.
Difficulties in the foreign exchange market arise if the current account deficit drives the national currency rate under pressure. A similar situation emerges if this deficit is not compensated by powerful cash injections of private capital. Difficulties are exacerbated if the budget deficit is superimposed on the current account deficit. The development of such a scenario could trigger inflation, experts warn.
In 2019, the balance of payments in the UK exceeds 5% of GDP, which worries analysts. The fact that the current election campaign resembles a battle for raising rates on additional government spending adds fuel to the fire. According to experts, if the British parties fulfill their promises regarding expenditures, especially additional public investments, the state budget deficit will amount to 3% of GDP. A similar scenario is possible if Conservatives win, and if Labour is in the lead, the budget deficit may exceed the level of 4% of GDP.
Nevertheless, there are factors that significantly reduce the threat of a currency crisis. These include changes in the monetary policy of leading regulators, due to which the increase in current account deficits and the state budget does not provoke inflation. According to experts, at the moment the financing of double deficits is made much more efficient and safer than before.
Currently, the British currency feels much more confident than before the 2016 referendum. Recall that three years ago, after a referendum on Brexit, experts recorded a massive collapse of sterling. Subsequently, the British currency traded 20% below its fundamental level.
At the moment, the pound is showing signs of growth. The GBP/USD pair started with low values on Monday morning, November 25, trading at 1.2851–1.2852.
In the future, the pair's efforts that aimed at increasing were not in vain. The GBP/USD pair jumped, and now it is near the levels of 1.2873-1.2874. Experts record an upward trend, which may persist throughout the current week.
According to analysts, the relative cheapness of the pound makes it less vulnerable to political shocks. The sterling does not lose stability even in the case of a negative scenario with double deficits. Many experts are certain that Brexit's negative consequences and double deficits are already included in the current sterling rate.
For a long time, the pound resisted political and economic pressure, trying to withstand these overloads. Many experts are worried about its further dynamics, believing that sterling cannot avoid a collapse in the event of force majeure in the elections. However, the market relies on the stability of the pound and on the optimistic election results, thanks to which the fragile balance in the British currency field will remain.
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