LONDON — Deutsche Bank has turned bearish on the pound once again, saying that any possible upside for the currency from next week’s election has already been priced into the market.
Writing on Tuesday, Deutsche Bank strategists Alan Ruskin and George Saravelos used their latest FX Blueprint note to warn investors it is “time to get bearish on GBP again,” after just over one and a half months of a positive outlook on the UK’s currency.
“A market-friendly UK election outcome already appears priced and the risks are now skewed to a disappointment,” the pair argue.
“Whatever the outcome, we believe a strong conservative majority is a necessary but not sufficient condition for a “smooth” Brexit. Initial talks look fraught with difficulty and the European stance is hardening.”
Consequently, even if Theresa May and her Conservative Party win a large majority next Thursday, sterling’s reaction is unlikely to be hugely positive. Once the election is out of the way, traders will turn back to impending Brexit talks, as well as the economic slowdown beginning thanks to the vote, and sterling could be in for more weakness.
Here is the pair once more:
“GBP positioning is much lighter, the evidence for a consumer-led slowdown continues to build, and the Bank of England is likely to stay firmly on hold through the remainder of the year. All this leaves inflows into the UK highly vulnerable to a rapid slowdown. We like selling GBP both against EUR and CHF.”
Since the referendum, Deutsche Bank has been consistently one of the most bearish sterling forecasters, and as recently as February, Saravelos argued that the pound could continue to fall, dropping as low as 1.05 against the dollar. At the time, he cited concerns about a potential “cliff-edge Brexit” as a key reason for that forecast.
Deutsche surprised many in the market in April however by reversing its structurally bearish call on the pound after Theresa May called for a general election, something Saravelos said at the time was a “game changer.”
Since that call — when sterling was at roughly $US1.27 against the dollar — the pound has passed above $US1.30, before falling to its current level of around $US1.2860 as polls showed a brief surge in support for the Labour Party.