Investing.com – British Prime Minister Rishi Sunak caught political observers by surprise on Tuesday by announcing the UK general election would be held on July 4, a departure from the widely expected fall schedule. Despite this unexpected development, the British pound was minimally impacted, with two-month implied volatility showing a modest rise of around 20 basis points to settle at 6.20, still relatively subdued compared to April’s levels.
The market’s lackluster reaction to the election news appears to reflect confidence in current opinion polls, which show the Labor Party with a significant lead over the incumbent Conservative Party. This assumption suggests that Labor under Keir Starmer could potentially form a government even without an absolute parliamentary majority. In contrast to previous years, current political developments in the UK such as trade relations with the EU, unfunded budget spending and the Scottish referendum pose only minor risks, according to market observers.
As the short election campaign begins, there is a possibility that sterling could react to the Labor leadership’s election promises unless there is any major shift in the polls in favor of the Conservatives. However, such moves are expected to be minor fluctuations within the pound’s broader trajectory, which is primarily influenced by domestic economic data, Bank of England (BoE) monetary policy and US Federal Reserve expectations.
From a market perspective, the recent service inflation surprise in the UK was seen as more significant than the election announcement. Following the inflation data, the market adjusted its expectations, now estimating policy easing by August of just 12 basis points, compared with the CPI forecast of 25 basis points and only 37 basis points by year-end. . Market analysts remain bullish on the currency despite the pair approaching the crucial 0.8500 support level and see no need to change their forecasts based on the UK election chart.
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