Sean Callow, Research Analyst at Westpac, explains that the most dramatic currency move over the past week was again driven by politics and the British pound is up 2.2% against USD, its rally sparked by UK PM May’s surprise decision to propose an election for 8 June, about 3 years early.
“The pound’s bounce is being attributed to the prospect of a larger Tory majority throughout the Brexit negotiations. Yet it is hard to claim that the pound had been suffering a risk premium linked to May’s position in parliament.”
“The real political risk premium on the pound is of course still very much intact – what sort of Brexit deal will be negotiated and what happens to the UK economy in the meantime? An overhang of speculative short GBP positions has been squeezed and with USD sentiment lukewarm, cable could yet make a run at 1.30. If so (perhaps in May), this could present an appealing opportunity to re-load on shorts, eyeing a return to 1.26 or below.”