Thursday, 4 May 2017

FX strategists expect Tory landslide in UK vote; no big GBP move

Britain's ruling Conservative Party will win June's election with a landslide, according to almost two-thirds of foreign exchange strategists polled by Reuters who said the result would have little effect on sterling.

Having fallen as much as 23 percent after last June's European Union membership referendum to touch a 31-year low of $1.1491 in October, sterling is now about 14 percent lower against the dollar, trading at $1.29 earlier on Wednesday.

Sterling hit a seven-month high last week as traders closed off heavy bets against the pound. Short positions on the pound were close to record highs, making "short squeezes" -- when traders close out those positions, pushing up the value of the currency -- more likely.

Medians in the poll of over 60 strategists, taken in the past week, showed sterling would be worth $1.27 in a month -- just before the general election -- but then weaken to $1.24 in six months before settling at $1.25 a year from now.

Predictions for a landslide win are in line with opinion polls and those latest sterling forecasts were little -changed from an April poll. But highlighting uncertainty, the range of 12-month forecasts was $1.11 to $1.39.

Against the euro, the pound EURGBP= will follow a similar path. In a month one euro will be worth 85.0 pence, in six months 87.8p and in a year 87.0p. Again, those forecasts were little changed from April.

Growth in the currency bloc will be steady but modest in the coming year, an April Reuters poll of economists showed, although that forecast was partly contingent on independent candidate Emmanuel Macron winning the French presidency this weekend.

Solid growth, coupled with higher inflation, means pressure is mounting on the European Central Bank to start dialling back its still-aggressive stimulus. But it kept its policy stance steady last week, even leaving the door open to more easing.

While markets expect the ECB to tone down the language in June, removing a bias for further easing, ECB President Mario Draghi gave no hint of such moves on Thursday, only venturing to say economic risks have receded.

The United States Federal Reserve, which has already tightened policy, is expected to raise interest rates twice more this year. In contrast, the Bank of England is not expected to do anything until 2019 at least.

As there is so far little clarity on how divorce talks between Britain and the European Union will progress, investors may instead return to looking at monetary policies.

"Last year, cable fell a long way below the level implied by its formerly close relationship with expectations for the differential between official interest rates in the UK and U.S. over the next two years," said Samuel Tombs at Pantheon Macroeconomics.

"This decoupling seemed to reflect Brexit fears, which could not be fully encapsulated in short-term interest rate expectations. But last week, this gap closed completely; sterling now is back to the level implied purely by interest rate expectations."


Thirty-two of 52 strategists who answered an extra question predicted a landslide Conservative win on June 8 and 18 a moderate win. Only two predicted a moderate Labour Party victory and none a landslide Labour win or a hung parliament.

According to the median forecast of those who answered the extra question, sterling would rally 1.0 percent against the dollar but dip 1.25 percent against the euro in the immediate aftermath of an overwhelming victory for the Conservatives.

Three recent opinion polls showed a rise in support for Britain's opposition Labour Party but Prime Minister Theresa May's Conservatives maintained a commanding lead ahead of the election, expected to define the terms of the country's EU exit.

May has said she expects divorce talks to be tough after EU leaders agreed stiff terms and voiced alarm at "illusions" in London that may wreck a deal.

If opinion polls and the strategists are right, May will win a new mandate for a series of reforms she wants to introduce in Britain -- and also a vote of confidence in a vision for Brexit which sees the country outside the EU's single market.

"It will likely give Theresa May the ability to pass domestic legislation with less uncertainty and, more importantly, the flexibility to negotiate the terms of Brexit without fear of being undermined," said Jordan Rochester at Nomura.

Previous Reuters polls have shown the pound's fate hangs on the tone of the Brexit negotiations. If the divorce negotiations turn fractious, sterling will fall, conversely if talks run smoothly, the forecast was for it to bounce.

Reference: Jonathan Cable

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