GBP: Positive vibes – Rabobank

Jane Foley, senior FX strategist at Rabobank suggests that GBP has found support on the prediction that the Tory party may have enough support to form a majority government and is likely to continue to react positively to any news that suggests the PM Johnson’s hand is set to be strengthened.

Key Quotes

“A Tory majority, however, could still prove to be a Trojan horse for the pound.”

“For GBP, any news that appears to increase the likelihood of a Tory majority is seen to be a positive factor. This may be in part due to the historic perception that a Tory government implies prudent budgetary management, but it is more likely related to PM Johnson’s Withdrawal Agreement. Insofar as the PM has a deal with the EU, it would appear that a post-election Tory majority would finally ‘get Brexit done’. What this logic does not take into consideration, however, is that the trade negotiations still have to be tackled. If these are unsuccessful the UK may still face a disorderly Brexit at the end of the transition period in just over a year’s time.”

“Since the Tory party has shed itself of many of its moderate MPs, there may be a greater risk that differences between a Johnson government and the EU will appear during the trade talks. In particular the EU has warned the UK against rolling back on regulation.”

“Already differences could be appearing on workers’ rights and possibly on tax. If trade talks do not go well the risks of a no deal Brexit would again rise since a Tory majority with several Brexiteers in the cabinet could be disposed to this outcome. A Tory majority may therefore bring plenty of scope for GBP volatility next year.”