One G10 currency that investors loved to sell in recent months was the pound in view of the lose/lose situation that the currency was seemingly in ahead of the General elections on May 7. A Conservatives’ win was good for the economy but could lead to Brexit whereas Labour had the reputation of growing public debt and wide fiscal deficits. The very fact that polls were so close added to the uncertainty pointing at unstable single-party or coalition government ahead.
We are conscious of the fact that the pre-election uncertainty is here to stay. We therefore suspect that the scope for GBP-outperformance is limited for now. That said, it also seems that a lot of negatives seem to be in the price:
1/ Fears about Conservatives win and Brexit may not fully reflect changing attitudes towards UK's EU membership. Indeed, recent YouGov polls seem to point at growing support of the latter.
2/ Labours handling of the economy may not be as damaging. In a recently published survey, Oxford Economics estimates that the UK economy could grow faster under Labour than under the Conservatives.
3/ Political uncertainty associated with hung parliament is here to stay but that seems to be the setting in many other European countries successfully governed by coalition or minority governments.
We think that the short-term squeeze in GBP can continue.
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