US Election’s Impact On The British Pound (GBP)

Elections, whether they are presidential, parliamentary, or referenda oriented, provide an abundance of uncertainty to the marketplace. Over the course of an election cycle, issues such as international trade, national security, and government spending become focal points of the national discussion. Contrasting ideologies are put on display as opposing factions compete for political power, each with a different vision for a nation's future.

Perhaps the election looked upon with the most interest is the United States general election. The result of the U.S. general election exerts much influence on the institutions of the world, and it's a major factor in global political and economic landscapes. As a longstanding ally of the U.S., the United Kingdom has a vested interest in the election's outcome. Trade and commerce agreements, future monetary policy, military alliance, and forthcoming economic development can all be affected by a change in the U.S. government.

The United States And The United Kingdom: Historical Context

The origins of the socioeconomic relationship between the two nations can be traced back to the colonisation of North America by Great Britain in the 17th and 18th centuries. Since that time, relations between the two countries have undergone long stretches of cooperation interrupted by periodic conflict. Dating back to the post-Revolutionary War era, with the exception of The War of 1812, the U.S. and U.K. have coexisted as staunch allies and economic partners. And as time passed, the U.S. eventually replaced Great Britain as the premier global superpower.

One of the contributing factors to the robust industrial growth exhibited by the post-revolution American economy was capital investment undertaken on behalf of Great Britain's government and private banking sector. During the latter half of the 1800s, Great Britain acted as the world's leader regarding capital investiture in America. For the years of 1870-1914, the U.K. devoted an average of 4% of the national income annually to U.S. industry. The outbreak of World War I spiked British investiture in the U.S., totaling 9% of domestic income.

The U.K.'s capital investments in America laid the foundations for political alliance throughout the 20th century. World War I and II placed an impetus on cooperation between the two nations, ultimately galvanising what was referred to by Winston Churchill as the "Special Relationship." The "Special Relationship" has included cooperation in many different facets of governmental function:

• cooperative trade and commerce legislation,
• shared intelligence,
• common military installations, and
• active participation in joint military ventures.

Trade Balance

From a purely economic standpoint, the U.S. and U.K. represent two of the wealthiest nations on the planet. In terms of gross domestic product (GDP), the countries rank third and tenth globally, respectively.

A vital component to each country's prosperity is international trade. The import/export relationship between the two is a viable one, with the demand for goods and services by the U.S. providing a market for British exports.

Statistically, the U.S. is the world's top importer of goods and services. For the year ending December 2015, imports to the United States totaled an estimated US$2.761 trillion.^[5] This fact is accommodating to the U.K., who ranks as the eleventh-largest global exporter of goods and services. The export sector of the U.K.'s economy plays a large role in its overall economic prowess, accounting for nearly 27.4% of its annual aggregate GDP.^[6]

The U.S. serves as the U.K.'s single largest trading partner and greatest consumer of its goods and services. Typically, the U.K. enjoys a positive trade balance with the U.S. For the year ending December 2014, the U.K. realised a surplus of US$13 billion, and overall, the U.K. has not sustained a trade deficit with the United States since 2005.

Politically, preservation of this trade partnership is often a "hot button" issue, and one that is of paramount importance to U.K. interests. An ongoing effort to enhance trade between the two nations is the proposed agreement dubbed the Transatlantic Trade and Investment Partnership (TTIP). It aims at removing impediments of trade and investment between the U.S. and the countries comprising the European Union (EU).^[8]

Originally, business interests in the U.K. were a driving force behind the negotiations surrounding the ratification of TTIP. However, in the aftermath of the "Brexit" vote, where citizens of the U.K. elected to leave the EU, the future of TTIP is unknown. The 2016 U.S. general election will play a pivotal role in negotiations surrounding TTIP, as a new administration will be elected to act on behalf of the United States.

Foreign Investment

It stands to reason that economic powers who share a long history and common language are somewhat predisposed to conducting business with one another. In the case of the U.S. and U.K., each exists as the other's primary investor of foreign capital.

For the year ending December 2013, outward investment towards the U.K. from U.S.-based multinational enterprises measured US$571 billion. Conversely, multinational investment aimed at the U.S. originating in the U.K. totaled US$518.6 billion. These levels of capital investment from private enterprise, coupled with a political atmosphere supportive of expanded trade, have fostered deep economic ties between the two nations.

US Monetary Policy: Republican Vs Democrat

The relative value of the British pound (GBP) to United States dollar (USD) is often the measuring stick by which the value of the pound is measured. One key factor that has considerable influence on whether the GBP appreciates against the USD is correlated with which U.S. political party assumes control of the presidency. History has shown that the victorious party in the presidential election, whether Democrat or Republican, is likely to adopt very different economic and monetary policies.

"Rational partisan theory" accounts for the differing political party's ideology and its impact on monetary policy and macroeconomic measures.^[10] Traditionally, Democrats favour economic stimulus through increased government spending and a "looser" monetary policy. On the other hand, Republicans favour fiscal conservatism and a "tighter" monetary policy. The differences are pronounced, and each approach has a vastly different impact upon the values of the USD and its related currencies.

Studies show that Democratic presidencies in the U.S. are more likely to adopt an expansionary monetary policy, while elected Republicans commonly favour stricter policy. Expansionary policy can behave as a conduit for higher inflation rates and subsequent currency devaluation, while fiscal conservatism is often associated with economic stagnation.

Empirical studies have shown that for the modern era of U.S. presidential cycles, this idea holds true. For the period of 1961-2012, the USD depreciated against the GBP during Democratic presidencies and held value during Republican presidencies. Under Democratic leadership, the GBP/USD averaged a value of £0.5159, while averaging £.5600 while presided over by Republican leadership. According to the study, the exchange rate of the GBP/USD is roughly 10% higher under Republican leadership when compared to Democratic administrations.

GBP: Election Day Trading

The election day and night can provide enhanced volatility and pricing fluctuation to any currency, regardless of its affiliation with the country whom is holding the election. In the case of the GBP and the U.S. general election, the chances of increased exchange rate variation will provide trading opportunity and exacerbated risk.

It's important for any trader or investor to account for the following events if actively trading the forex market during election day:

• Breaking news: Announcements by institutional traders regarding pending election results in addition to comments by U.S. Federal Reserve members and foreign leaders can cause spikes in the short-term volatility facing a specific currency.
• Be aware of exit survey data: Exit surveys (polls) are used as predictors of election results. Strong polling data can be seen as an indicator that the election has already been decided, and market chaos may ensue as traders attempt to capitalise on the information.
• Know when the voting polls close for influential states: It is important to realise that the forex market remains active 24 hours a day, Sunday through Friday. Upon the closure of the polling centers in crucial "swing" states, it is very possible for the markets to react in anticipation of a result, influencing open market positions. Poll closures are time-zone sensitive, and the exact schedules must be respected by active traders.

For the GBP, it is very possible to experience pricing volatility during the run up to, on, and after election day. The U.S. presidential election of 2016 occurs at a unique time in the history of the U.K. and pound. In the post-Brexit marketplace, the GBP has undergone a period of devaluation and subsequent rebound. A pending U.K. general election looms large in addition to the result of the 2016 U.S. presidential election.

From a fundamental standpoint, the situation facing the GBP is unprecedented, and its valuation is open for interpretation. It is very possible that the U.S. election may provide the currency a direction, or at least fuel further debate over its worth.

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