The most detrimental outcome for sterling is no government. Sterling trades with a high political risk discount due to a reliance on foreign investment to fund the UK’s current account deficit. British pound (GBP) depreciation is expected on an inconclusive result whereas any government would see sterling appreciate initially. Short-term, politics matters for sterling. A Labour government that eases fiscal austerity and prompts the BoE to hike rates sooner would likely be sterling supportive. A Tory government raises the prospect of a UK EU referendum. Markets are currently overlooking this risk but the likelihood of a referendum after a Tory win could quickly see sterling re-price for increased political uncertainty.
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