Labour Party leads as economy recovers. What does it mean for the FTSE 100 and GBP/USD?

In late May, UK Prime Minister and leader of the Conservative Party, Rishi Sunak, called a snap general election for 4 July. Legally, the election did not have to be held for another six months, and many experts expected it to occur in October or November.

Local elections and Conservative Party's decline

The decision to hold the election followed a series of local elections in which the Conservative Party lost 474 councillors across England. Overall, the Conservative Party finished third (515), well behind the Labour Party (1,158) and the centrist Liberal Democrats (522).

Calculated risk and public sentiment

The decision to call an earlier election was a calculated risk based on the belief that the incumbent government could capitalise on improving economic conditions. With the economy on the path to recovery and inflation showing signs of decline, the government is hopeful that better times are on the horizon for the economy and households.

Despite the incumbent government's hopes, the latest polling compiled by Bloomberg paints a different picture. Keir Starmer's Labour Party holds a commanding 20.8-point lead (41.3%) over the Conservatives (20.5%), with Nigel Farage's Reform UK Party in third (15.5%).

Economic challenges and Labour's policy direction

Over the past 15 years, the UK economy has grappled with significant challenges. The basic prosperity gross domestic product (GDP) indicator per person plummeted after the global financial crisis of 2008. Real wage growth has been stagnant, marking the worst trend in a century, and real disposable incomes have dipped below 2019 levels.

However, a sharp change in direction under Labour is unlikely, as they have emphasised stability in their election pitch with Keir Starmer seeking to shed the Labour Party's "tax and spend" image. As a side note, there is room for Labour to attempt to remove some of the trade barriers erected after Brexit. However, this will likely take time to filter through.

FTSE, GBP, and BoE rate cut probability

While there may be some subtle shifts at the sector level under a Labour government, the election results will unlikely shift the macro backdrop for the Financial Times Stock Exchange Group (FTSE) or the British pound (GBP). The possible timing of the first Bank of England (BoE) rate cut is of more importance.

Last week's cooler inflation report for May reflected 2% year-on-year (YoY) vs 2.3% prior. Following cooler inflation and a dovish BoE meeting, the interest rate market is assigning a 50% probability for a first 25 basis point (bp) rate cut in August, in addition to a 25 bp rate cut fully priced for the BoE's September meeting.

FTSE technical analysis

After holding a bullish stance in the FTSE since mid-March, which caught the FTSE's blistering run higher, we moved to a neutral bias ahead of the BoE meeting on 9 May, looking to rebuy a pullback.

While we aren't entirely convinced, we have seen the lows following the FTSE's 4.3% pullback from the May 8474 high, we hold a positive bias, provided the FTSE remains above support at 8050/8000. Aware that a sustained break below support at 8050/8000 would signal that a deeper decline is underway and a shift back to a neutral bias.

FTSE daily chart

GBP/USD technical analysis

The dominant feature on the GBP/USD chart is the downtrend resistance coming from the July 2023 1.3142 high, which has capped the rally from the April 1.2299 low.

While the British pound has tried several times to break above here since the UK general election was called, it has thus far failed to cement a daily close above, which we deem as critical to determining if a sustainable break higher is underway.

Thus, while GBP/USD remains below resistance at 1.2800 (closing basis), allow for a deeper decline towards the 200-day moving average at around 1.2550. Aware that a sustained break above 1.2800 and above the mid-June 1.2860 high opens the way for the rally to extend towards 1.3000.

GBP/USD daily chart

• _{Source: TradingView. The figures stated are as of 25 June 2024. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}