'Early elections are a game-changer': One of the most pessimistic forecasters on the pound is changing course

George Saravelos, Deutsche BankScreenshot/Bloomberg TVDeutsche Bank’s George Saravelos.

LONDON — Deutsche Bank, one of the most pessimistic financial institutions on the pound since Britain voted to leave the European Union, is changing course and reversing course on its “structurally bearish” view of the currency.

Writing on Tuesday, George Saravelos Deutsche’s global co-head of FX research calls Prime Minister Theresa May’s decision to propose a snap general election a “game-changer” that has pushed the German banking giant to reconsider its position on the currency.

“We have been structurally bearish on sterling for the last two years but are now changing view,” Saravelos writes in a note circulated to clients a little earlier.

“We are closing out all our bearish FX trades. We intend to review our sterling forecasts in coming days.”

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.

However, now that May has called for the general election, things look drastically different.

Here is Saravelos once again:

“Today’s general election announcement changes the outlook. We do not see the election as a mandate for hard Brexit. Instead, assuming current polling proves correct, it should result in a larger Conservative majority. This will have three material implications, in our opinion.”

The three material changes cited by Deutsche Bank are as follows:

  1. “The deadline to deliver a ‘clean’ Brexit without a lengthy transitional arrangement by 2019 far less pressing given that no general election will be due the year after.”
  2. Deutsche Bank argues that MPs pushing for a hard Brexit will have their influence diluted, thanks to a larger Conservative party majority.
  3. Finally, Saravelos suggests that a fresh election strengthens “the PM’s overall negotiating stance who in recent weeks has clearly fallen in line with the European negotiating approach.”

Sterling has surged since May made the announcement, climbing more than 1.2% from its opening price on the day, and passing above $US1.27 to hit a level not seen since December 2016.

Here is how that looks:

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