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Sterling Flies On Election Call But Can It Last?

Published 04/19/2017, 07:04 AM
Updated 07/09/2023, 06:31 AM

Well, we weren’t expecting that

Theresa May’s decision to call a snap election broke Westminster out of its post-Easter slumber and the pound out of its trading range. Sterling leapt by over 2% through the session to 6 month highs against the euro and 4 month highs against the US dollar.

Sterling higher for 3 reasons

The gains for sterling were for a number of reasons. Firstly, markets love mandates and a government that is more able to get on with the policies that it is was voted into power to enact is seen as a positive. Given the expectations of the bookmakers and pollsters the Tories look certain to add to their current majority of 17. Should the majority be larger, expect to see Theresa May ignore the more extreme members of her party on leaving the EU without a deal.

Secondly, the change in election timing is important. While the Fixed Term Parliament Act means that elections must happen every five years, yesterday’s announcement means that the election after the one in June will take place in 2022. Given the Brexit stopwatch expires in March 2019 then that left a little over a year for everything to be tied up on Brexit before the next election; now we have another two years. This makes the chances of a transitional arrangement – an orderly withdrawal as opposed to crash-out-on-WTO-rules – more likely.

Thirdly, the number of investors and traders who came into this week short on the pound – i.e. betting that the pound would fall – was at a record highs. Those same investors pulling those bets out of the market and going off to lick their wounds will have helped the pound higher too.

The next question is of course whether this continues.

Whether GBP gains remain depends on these factors

Once again, there are three questions that must be answered; what does this do to change policy in Brussels? Can an election change the economic bearing of the UK economy? And do you believe the pollsters?

We think that any belief that Europe will give the UK a better deal because Theresa May has a bigger mandate at home is mistaken. Many leaders in the past have gone to Brussels with domestic victory medals shining on their chest only to get little from EU leaders. We do not think an increase in the Government’s seats will change that.

On the economy, cynics would suggest that May is getting this election in before things really go to pot here in the UK. We are forecasting that UK consumption will remain weak and investment flows poor, providing further opportunity for UK data to underperform.

Lastly pollsters have the Tories with a 20 point lead which looks to be unassailable. To be honest it probably is, and while her plan is likely to be to consume UKIP now that they have got what they want while remaining happy to lose some seats to Lib Dems for bigger chunks of Labour Party territory, turnout of the youth vote will once again be crucial. If 18-24yr olds who didn’t vote in the EU referendum but feel disenfranchised by its effects turnout then the numbers will look a lot different.

So where to?

On this basis, we think that investors will use the cover of the election to build up bets to take the pound lower once again. Our target of GBP/EUR hitting 1.20 before the French election was hit overnight and our longer-term view of a move lower to 1.10 now takes effect.

The Day Ahead

Today’s data calendar is quiet although the Federal Reserve Beige Book – regional surveys of the US economic outlook – may illuminate thoughts on inflation.

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