Sterling looks set for a volatile run into British elections next week but an argument can be made for markets reacting positively to a defeat for UK prime minister Theresa May’s Conservatives, according to analysts from US banking giant JPMorgan.
The Conservatives’ lead has shrunk in some opinion polls to as low as 5 percentage points from close to 20 points a month ago, driving the pound lower in the past week.
That has seemed to be in line with traditional financial market logic, which has usually favoured right-leaning parties who keep a tighter rein on public spending over those such as Britain’s left- leaning Labour Party, led by Jeremy Corbyn, who want to tax more and spend more.
But the US bank — the world’s second biggest trader of currencies, according to industry surveys — said the prospect of a softer Brexit from Europe under a Labour-led administration meant sterling might react positively to a defeat for Ms May.
“A hung parliament would in more normal circumstances be viewed as quite negative for sterling,” Paul Meggyesi said in a note distributed to media and sent to clients at the end of last week.
“But, in the post-referendum world, all political developments need to be viewed through a Brexit prism and an argument can be made a hung parliament which delivered or held out the prospect of a softer-Brexit coalition of the left-of-centre parties ... might actually be GBP positive.”
However, a shrinking lead in the polls for Ms May is “bad news for the pound and clearly markets have been trading it that way in the last couple of weeks”, according to Peter Kinsella, a senior foreign- exchange and rates strategist at CBA Europe.
“It should be stated, however, the Conservatives still maintain a very healthy 10 or 11 point lead in the polls and it would be hard to see that compress much further,” said Mr Kinsella.
Following its sharp losses late last week, sterling rose for a second day, trading at 86.8 pence. JP Morgan also raised UK stocks to ‘neutral’, saying they were at the cheapest-ever levels on a price-to-book basis relative to the rest of the region.
“We think UK is becoming interesting in the regional allocation again,” JPMorgan’s strategists, led by Mislav Matejka, said in a note to clients.
Reuters, Irish Examiner, and Bloomberg staff
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