GBP: Guided by the UK politics - Rabobank

Given investors’ tendency to be suspicious of left-leaning governments, sterling found a little comfort on the news in early European hours, though failed to push above the GBP/USD1.2980 level, according to Jane Foley, Senior FX Strategist at Rabobank.  

Key Quotes

“Given that a large Tory majority can no longer be assumed, such a scenario would likely be celebrated by the pound tomorrow, even though this may be the only election outcome which will commit the country to a hard Brexit.  Sterling looks set to weaken on any other outcome.  This implies that for sterling investors concerns over fiscal management are overwhelming those related to Brexit.”

“Despite the increase in momentum behind Corbyn in recent weeks, very few opinion polls have suggested that his has a chance of winning a clear victory in today’s election.  A hung parliament, however, could be within the realms of possibility.  Given the question mark that would appear over PM May’s future, not to mention the country’s approach to Brexit, this outlook can be expected to lead to a tumble in the value of the pound and a period of heightened volatility.  On this scenario is would seem unlikely that the Brexit talks could commence as planned on June 19.  Although the soggy tone of the USD would lend support, this scenario could result in cable lurching back towards the GBP/USD 1.25 area as EUR/GBP pushes towards 0.90.”

“A clear majority for May, however, would increase hope that the Brexit process would be orderly.  Cable would likely pop above the 1.30 level and EUR/GBP could stabilise at moderately lower levels.  That said, we see risk that GBP may not be able to hold its better tone for long.”

“While an improved majority for May could make her Brexit deal easier to sell to parliament, it will not change the perspective of the EU27.  May could win back some favour with investors perhaps with an early agreement regarding the rights of EU citizens.  However, the size of the Brexit payment and the dilemma of the Northern Irish border could be more difficult to negotiate.  Assuming that the issue of trade between the UK and the EU27 is addressed later this year this could also prove to be a worry for investors.  Meanwhile the impact of falling real wages will continue to cloud the outlook for UK consumption and economic growth.  Despite our expectations of a soften USD during H2, we expect GBP/USD to end the year in the 1.28 region and for EUR/USD to end the year around 0.89 based on a continued May led Tory government.”