LONDON — Just as things looked like they were starting to get back to normal for the British pound, the calling of a general election by the Conservative government has flipped the currency on its head for the second time in less than 10 months.
Having previously been a cyclical currency, and moving on major economic events like data releases and interest decisions, in the second half of 2016 sterling became part of a growing trend of currencies being driven not by such events, but rather by political developments, especially those related to Brexit.
In the last handful of months it looked to have bucked that pattern, trading on data releases and calendar events, and only moving small amounts in those instances. However, with an election now just seven weeks away, politics looks set to become the dominant force driving Britain’s currency once again.
Since the election was called, Britain has only had one significant data release — retail sales numbers from the Office for National Statistics on Friday.
Those numbers were bad to say the least, with sales dropping 1.8% in the month of March, and seeing their third consecutive decrease on a three-month by three-month basis. Sterling, however, barely shifted, dropping around 0.16% from its pre-release levels.
By contrast, the day that Prime Minister Theresa May announced she would seek an election sterling roared higher, reflecting a belief in the markets that May increasing her majority will allow her to take a more conciliatory stance on Brexit, and move away from the sort of Brexit favoured by hardline Conservative MPs, who currently have a disproportionate influence on policy thanks to the party’s slim majority.
Sterling had broadly stopped reacting to major political developments in recent weeks — at least in as strong a manner as it did during the first few months after the referendum. For instance, when Prime Minister Theresa May triggered Article 50 of the treaty on European Union, formally beginning the process of Brexit, sterling hardly budged.
Now the election has been called, expect that to change. Polls showing strong support for the Conservatives will likely boost sterling, while any hint that Labour could have a realistic chance of shrinking the Tory majority should bump the pound lower.
This means that broadly speaking moves in the pound are likely to be higher, rather than lower.
That is a view held by Deutsche Bank, one of the most pessimistic forecasters on the pound since Britain voted to leave the European Union, which has changed course on its “structurally bearish” view of the currency.
Writing on Tuesday, George Saravelos Deutsche’s global co-head of FX research called the election a “game-changer” when it comes to sterling.
Forecasters predicting a rise in sterling — at least in the short term — are now in the majority, with most economists seemingly seeing the pound remaining at its current level at the least, with one forecaster, Morgan Stanley, even arguing for a $US1.45 valuation by the end of 2017. That would but it within just 2% of its pre-referendum level.
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