Labour win: Sterling to euro stable but what impact French elections?

Financial markets have reacted to Labour’s landslide win in the UK overnight, with sterling having risen against the euro and dollar before markets opened this morning (July 5).

Before 08:00 (when markets opened), sterling rose 0.1% against the US dollar (the highest level in two weeks) but by just 0.01% against the euro, to €1.180.

Sterling had remained flat against both the euro and dollar as the exit polls came through yesterday evening and polls closed at 22:00 (UK time) but then rose very slightly. The small rise indicates a positive-but-stable reaction from the markets.

This is a sign that the UK is not seen as being in political turmoil or risk currently. This is partly because Labour had long been predicted to win ‘big’ in this election, so the result was not a major surprise.

Centre-left party Labour has won 412 seats (with 326 seats needed for a majority in the House of Commons), in a landslide victory (with two seats left to declare at the time of writing). It gained 211 seats, while the centre-right and previously-ruling party the Conservatives lost 250 (and now have 121 seats overall).

The left-wing Liberal Democrats won 63 seats (and now have 71 in the House). The right-wing Reform party, led by former UKIP leader Nigel Farage, has won four seats, including Farage himself (for Clacton, Essex).

‘Impact of new government’

An economist for Investec Economics said that changes in the economic landscape were more likely to come once the impact of the new Labour government is felt. 

“What will matter more to markets, ultimately, is what a Labour government chooses to do if and when it takes office,” he said, to the Independent.

A banking specialist told Le Figaro that “it remains to be seen whether Labour will be able to solve the problems [in the UK], especially concerning relations with the European Union. Lots of things are not going well in the UK”.

He added that the “overwhelming majority of the Labour party should bring positive, political stability to the British economy at the time when growth is starting to increase, with the decline in shock energy prices and the return of real increases in [people’s] income”.

"Labour's victory means that we have entered a period of relative stability in UK politics”, said Mark Nash, Huw Davies and James Novotny, investment managers at Jupiter AM to Le Figaro. 

"The UK may well look like a haven of political stability, a very different landscape to the years following the Brexit referendum.”

They also said that the markets are likely to show more change in the run-up and aftermath of the US election in November.

Legislative elections in France

Back in France, it is more likely that the European financial markets will react more strongly to the results of the second round of legislative elections in France, which will take place this Sunday (July 7).

The first round saw the far-right Rassemblement National win the most votes, in what some may have seen as a shock result. However, the euro has since rebounded, and has remained stable so far, suggesting that investors remain sceptical that the RN will take power.

A hung parliament is now considered a likely outcome. The euro has remained strong against the dollar this week, apparently in response to this less seismic shift.