UK Local Elections: Stay Bullish on GBP

Noise around the UK local council elections highlights the fact that in today's lightning-fast media cycle not every election matters equally. Pundits are trying to make the case that a wide victory by PM Theresa May's Conservative Party suggests a sweeping victory in the General Election on June 8. But we suspect that this latest vote is more focused on local issues and less about Brexit. Making an extrapolation to broader voter sentiment is difficult, especially given a low turnout.

Yet in the short-term, why not trade in the sentiment. A solid showing by the Conservatives should equal a chance of a significant majority in the national vote next month. Should May receive such an electoral mandate, this should empower the UK's position heading into UK-EU Brexit negotiations. We would fade the hype and continue to believe the current harsh rhetoric (£100bn divorce bill) does not represent the probable end result.

UK fundamentals remain solid as composite PMI data suggests strong 2Q growth momentum (April rose to 56.2 from 54.8 above 54.5 expected) but we recognise that PMI did over predict 1Q growth performance. Predictions of a seizing up in consumption behavior by households and/or businesses have not occurred. Finally, devaluation of GBP continues to deliver dividends for exporters and manufacturing. We therefore remain bullish on GBP especially against the EU and JPY.