Sterling steadies after UK polls as focus falls on looming European Parliament elections

Sterling steadies after UK polls as focus falls on looming European Parliament elections

Sterling and shares brushed aside the UK local election results as investors focused on the potential fallout from the European Parliament elections later this month.

Against the euro, the pound was little changed at 85.6p after both the Conservative and Labour parties lost council seats, meaning Britain’s political deadlock over Brexit would likely last longer.

Trading in the pound has become far less volatile as investors sit on the sidelines while British politicians try to find a way out of the impasse.

The UK will not leave the EU until possibly the end of October after London and Brussels agreed a delay.

“We believe that persistent Brexit uncertainty combined with concerns over slowing growth overseas will deter the BoE (Bank of England) from delivering a more immediate rate hike. We remain sceptical that cross-party Brexit talks between the government and Labour will prove successful,” MUFG analysts wrote.

Following the June 2016 referendum, the pound sank and continues to trade well below the $1.50 rate before the decision to quit the EU.

But that postponement has left consumers, businesses, investors and market speculators in limbo as they still don’t know under what terms the two sides will part ways.

The median response of market participants, when asked by a Reuters poll where sterling will trade in the runup to the new divorce date of October 31, was $1.27.

“In the event of progress with regard to the withdrawal agreement being passed by the UK parliament or if a parliamentary consensus emerges, sterling could rally,” said John Fahey at AIB.

Any move that markets view as increasing the probability of a no-deal Brexit could see sterling come under pressure.

Against the euro, the pound will flatline.

The median forecasts in the poll for one, six and 12 months were steady at 86 pence, slightly weaker for sterling than the across the board 85 pence given last month.

However, Capital Economics said that the fallout from the European elections later this month could “indirectly” affect UK gilts more than other European government bond markets if the UK does participate in the EU polls.

“If it does, polls suggest that the ruling Conservative Party would come third. This would have the potential to lead to a political change, breaking the current deadlock in (the UK) parliament.

Because of the wide range of possible outcomes in the UK — a new Conservative leadership, a general election, a second referendum, etc — it is impossible to know the precise effect that the change would eventually have on the Gilt market.

"But we would not be surprised to see a sharp increase in volatility,” the economists said.

In the report, ‘Why bond investors shouldn’t dread the EU elections’, Capital Economics said bond markets in Italy, France, and Spain will likely be unscathed, mainly because markets anticipate a large increase in the election of anti-EU MEPs to the EU Parliament.

“First and foremost, the rise of anti-EU parties is largely expected, and so probably already discounted in the markets.

“We also think that fears that EU-level policymaking will become much more difficult are over-stated,” according to Capital Economics.

However, rising support for populist parties remains a threat to the eurozone in the long term.

- Additional reporting Reuters

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