Conservatives majority: what next for the pound?

The votes have been counted and for the first time in a long time, the opinion polls were on the money – just as we were losing faith in them – after the Conservatives achieved a majority in Parliament. For the pound, this has meant a much-needed surge in value during the election campaign, as hopes that the Conservatives could win a majority and ‘get Brexit done’ gathered momentum. This election optimism caused it to strengthen by about 2% since the vote was called in late October, hitting seven-month highs against the dollar (around $1.32) and edging over €1.19 against the euro for the first time since May 2017.

So, what next now Boris Johnson has the platform he needs to make Brexit a reality and action his other policies?

Brexit

First things first, and that means addressing the issue that triggered the election to begin with and formed the backbone of the Conservatives campaign promise: Brexit.

A few weeks ago, Mr Johnson informed the nation that every Tory candidate standing in this election has pledged to pass his deal that would take Britain out of the EU by the January deadline. Now that he has the numbers in the House of Commons to deliver this pledge, it’s safe to say Britain will leave the EU in a matter of weeks. This will bring an end to the Brexit-fuelled uncertainty that has hampered the pound since the 2016 referendum – for now at least.

However, officially leaving the EU won’t simply signal the end of Brexit. The PM has pledged not to seek an extension to the transition period beyond next year. He has been bullish in his belief that he will be able to negotiate a full free trade deal with the EU. But if the withdrawal agreement proves controversial that might be easier said than done.

If he negotiates a basic agreement, there will be widespread disruption to existing EU/UK trade, with some firms potentially going out of business. And there will inevitably be economic disruption as businesses adapt to the new trade relationship.

Whereas, if he decides to make a deal that keeps the UK more aligned with the EU, he is likely to rub some of his party colleagues up the wrong way. Consequently, they will feel well within their rights to claim that it is not the type of Brexit they were promised during their election campaign.

All the pound asks for is clarity, but with Brexit done, could its short-term gains be swallowed up by yet more uncertainty, as the complexity of our departure from the EU unravels?

Tax

Having achieved a majority, there will be pressure on new Conservatives MPs – particularly those that triumphed in marginal seats outside of the Tory heartlands – to adopt policies that benefit their constituents. That could scupper Mr Johnson’s aspiration for tax cuts for higher earners.

According to the Conservatives manifesto, there will be a bit more spending – to the tune of around several billion not several tens of billions – and a bit more tax too. Although this amounts to less than 1% of the size of the economy.

The pound obviously responds well to domestic economic health. Time will tell how the government’s tax and spending plans impact inflation, GDP and ultimately interest rates.

Corporation tax

Since regaining power back in 2010, the Conservative government has cut the UK corporation tax rate from 28% to 19% in 2019, creating significant savings for businesses. However, Boris Johnson made a U-turn on corporation tax recently, by announcing that he would delay planned cuts from 19% to 17% next April – a proposal made by former Chancellor George Osborne in 2016 that was designed to boost business following the EU referendum. The PM declared that the rate all firms pay on their profits would remain at the current levels indefinitely, freeing up funds for other priorities like crime and the NHS.

According to government figures, cuts to the headline rates of corporation tax between 2010 to 2019 have deprived the national purse of around £13 billion a year. They estimate that a further reduction from 19% to 17% would cost another £6 billion – funds the Conservative government has promised to make available for ‘national priorities’.

If they are true to their word, this would leave decision-makers trying to work out how they can make savings elsewhere. For businesses with international payment requirements, the answer could lie in something that’s within their control: their exposure to currency market risk how they mitigate it. Whether you run a cross-border business or you’re an individual that needs to send funds overseas, you will benefit from working in partnership with a currency specialist.

If you’re concerned about the volatile currency markets and the impact of the election on the pound, contact our international payment experts. They can provide the guidance you need on your foreign exchange and currency risk management strategy.

Email: brexit@rationalfx.com
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