Pound now faces economic pressure

Financial and commodity markets analytics

The British pound has remained well supported over the past few trading sessions after the Brexit party decided not to field more than 300 candidates in the upcoming British election which has greatly increased the chances of Boris Johnson winning a majority and being able to pass his Brexit deal without any obstacles.

A majority Johnson government is seen as the best scenario for the British currency as it would end years of uncertainty surrounding the future. Of the UK and the market would welcome the political stability

"The most bullish scenario for GBP given our assessment of these issues is likely to be a large Conservative majority, in line with the current opinion polls. Yes, this would deliver Brexit but Johnson would have the political wiggle room to slowly dilute the relatively hard Brexit currently envisaged in the political declaration. At the very least a large majority would limit the ability of the ERG to block an extension to the transition period beyond end 2020," says Paul Meggyesi, an analyst with JP Morgan in London.

Even if Boris Johnson’s government does remain in parliament, the damage done to the UK economy because of Brexit may linger on for some time and the Bank of England may need to cut interest rates in the nearest future which is in stark contrast to a few months ago where it was predicted the central bank would lift interest rates.

So any gains after the elections may be short lived and the focus will be once again on the UK economy which is facing all sorts of problems which the BOE highlighted in their latest monetary statement

"The outcome from the BoE surprise dovish shift yesterday could be that the pound is more sensitive to weak data releases in the weeks ahead. Labour market momentum has certainly weakened and confirmation of that next week would reinforce GBP selling pressure. The BoE forecasts GDP growth picking up from 1.2% this year to 1.4% next year but Governor Carney admitted downside risks yesterday. We would agree. Finally, speculative short positioning amongst leveraged accounts remains modest pointing to scope for fresh selling ahead," said Derek Halpenny, European head of global markets research at MUFG


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