The pound was under heavy pressure Monday on news over the weekend that Prime Minister Gordon Brown has made a Lazarus-like recovery in the polls before May’s Election.
A survey by research and consulting firm YouGov showed Brown following David Cameron’s opposition Conservatives by just 2 percentage points just 12 months after trailing by nearly 20 points.
The market is selling the pound heavily on the poll, on the assumption that a hung parliament or a Brown win on May the 6th would be bad news for the currency.
Short term, it is probably a good call as uncertainty over the result of the election is just what the market does not want at a time when some in the market are questioning Britain’s ability to maintain its Triple-A credit rating as its debts soar.
But consider the converse. A hung parliament will be good for Sterling because it will ultimately see the UK join the euro. Imagine on May 6 that Labor wins the most seats in Britain’s parliament but fails to win an outright majority.
Gordon Brown would then have to make a deal with the Liberal Democrats to form the next government.
Peter Mandelson, the UK Business Secretary would also be seen as Brown’s savior and would in effect be the man leading those talks and as a euro supporter would be dealing with a Liberal Party that also believes Britain would be best off in the single currency despite its current problems.
Simon Derrick from Bank of New York Mellon said the idea may seem absurd at this point, but he believes it should not be ruled out completely.
"It seems reasonable to believe that if EUR/GBP starts to head back towards parity (as some are forecasting) then the topic of euro zone membership for the UK could re-emerge," Derrick told CNBC.com.
As if losing the election that should never have been lost would not be painful enough for David Cameron already. Imagine how the how painful it would be to watch a Brown/Mandelson government lead the UK into the euro as well.