Hung parliament bad for the pound, says ING

A hung UK parliament would be the worst outcome for the pound sterling over the short term, according to ING.

With opinion polls suggesting no single party will win enough seats to govern alone after polling day on 7 May, the bank said on Wednesday that election associated risk premium currently reflected in the GBP "would stay in place."

“Beyond the risk premium, the likely knee-jerk market reaction would be to sell GBP,” it added.

If there is a government, irrespective of who it is, the pound is likely to appreciate.“We would expect the GBP political risk premium to decline both in the case of a Labour-Liberal Democrat minority coalition and a Conservative-Liberal Democrat minority coalition, meaning that GBP would appreciate somewhat.”

However, ING expects a greater short-term positive response in the case of a Conservative-Liberal Democrat minority government, as Conservative policies are generally perceived as being more business-friendly than Labour’s.

“While the GBP political risk premium is unlikely to dissipate after the election, we still look for a EUR/GBP downtrend over the coming quarters,” said the bank.

ING noted that the political uncertainty associated with the pound is unlikely to be enough to significantly delay the start of the Bank of England tightening cycle, which it expects either in the fourth quarter of this year or the first quarter of 2016.

The best outcome for the pound in the long-term would be the mix of a Conservative-led government and a vote to stay in the European Union, it added.

“A more business-friendly government would remain in place; and delayed investment projects being finally implemented and the return of confidence in the UK would lead to a rebound in UK asset prices, GBP included,” ING concluded.