Pound holds on above $1.28, but opinion split on next steps

Sterling is holding on to the gains it made yesterday, when it rushed to six-month highs on Theresa May’s call for a snap election.

The currency is roughly flat on the day so far, at $1.2822 after strengthening 2.7 per cent to an intraday high of $1.2905 yesterday, its highest since early October.

Mrs May is expected to win an increased majority in the general election, which had not been due to take place until 2020, with the FT poll tracker giving the Conservatives an 18-point lead over Labour.

The House of Commons will vote today on whether to trigger an election.

Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ thinks the currency’s rally has much further to run:

We would argue that this sterling bounce will prove more sustainable and is more than just a position squeeze in a continued bear market.

This decision will in fact shift us away from the probability of a ‘Hard Brexit’ and an easing of those concerns can propel the pound further higher. The pound fell out of the $1.30-$1.35 trading range in response to the speech by PM May on 2nd October last year outlining the strategy for Brexit that included the deadline date of 31st March 2017 for triggering Article 50.

That speech was deemed as confirming PM May as being in the ‘Hard Brexit’ camp. We suspect the calling of this election will slowly see this conclusion shift and the consequence of that should be sterling moving back into the $1.30-$1.35 trading range.

Daiwa Capital Markets Europe expects Mrs May’s Conservative party to win a landslide victory, in part because the opposition Labour party is “total disarray, unable to articulate a credible policy on Brexit or any other major domestic or foreign policy issue.” It agrees this is likely to reduce the likelihood the UK will leave the EU without any deal in place.

It added:

By increasing significantly the Government’s working majority, perhaps to more than 100 seats, the General Election might be expected to strengthen May’s hand within Parliament and her own party, particularly against those Conservative MPs who have advocated harder versions of Brexit. Indeed, with a larger majority, it might seem more likely that whatever deal May eventually negotiates with the rest of the EU will be rubber-stamped by Parliament.

Pantheon Macroeconomics expects the Conservative party to increase its majority but says tactical voting may limit gains. Pantheon views the timing of the election as giving Mrs May more time to negotiate trade deals after Brexit talks conclude in 2019 as the next election can be held in 2022 therefore boosting chances for an economic recovery before the vote. On the previous schedule, the election would have been held in 2020.

But it added:

In short, we think that sterling’s rally yesterday is vulnerable to a swift reversal, as markets appreciate that the chances of an ultra-hard Brexit also rise with a larger Conservative majority, and investors recoil in response to additional political uncertainty.

Germany’s Commerzbank is also not convinced:

The EU is in no mind to make Brexit enter the history books as a success story. We therefore remain sceptical about sterling.