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CLEGG EFFECT WEIGHING ON STERLING

BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT

EVER since Nick Clegg’s winning performance in the first television debate, the spectre of a hung parliament has tempered cable’s rally despite surprisingly positive UK economic results. The emergence of the Liberal Democrats as a political force has served to complicate matters considerably, increasing the possibility of an equal three-way split of the popular vote.

As the week started, Labour was last in most polls, and its position was made weaker when Clegg said on Sunday that he would find it unacceptable for Gordon Brown to remain prime minister if he came third in terms of the number of votes. Yesterday Clegg clarified his position and said that he has not ruled out going into coalition with Labour in such a situation – just not with Gordon Brown. In that situation, another of the Labour high command would become PM.

The complexity of the British electoral system is making this even harder to read: at the time of writing, the Lib Dems are predicted to win at most around 90 seats, with the Tories 290 and Labour 250. Though they would be the junior partner in any coalition, the Lib Dems’ number of votes will give them some moral, if not numerical, authority.

While many think that this political uncertainty could threaten the rally in cable it may not necessarily be so. I have long argued that instead of being a problem, the emergence of the Lib Dems could actually strengthen the political process. A solid coalition between the Labour and Lib Dems would be a more natural fit than one between the Tories and Lib Dems. It would make a second election later in the year less likely, and would allow for quick and broad legislative action on the fiscal front. That thesis rests on the assumption that Lib Dems and Labour would be willing to negotiate after a bruising election campaign and would quickly come to terms on a deal for coalition rule.

But nothing is certain. Now he is the kingmaker, Clegg may be in danger of overplaying his hand. The idea of some sort of unity is why sterling has shrugged off most political worries, trading above the $1.5000 level. But the situation remains fluid. If the markets remain uncertain about the Lib Dems’ intentions, then cable could tumble.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail borisandkathy@gftuk.com.