Theresa May shocked the markets yesterday when she called for a snap election in June. As such, the Pound has staged a significant rally and continues to approach 1.20 against the Euro and 1.29 against the US Dollar.

Sterling surges as May shocks the market

Many FX analysts had been expecting quite a tame week for GBP rates and to be fair on the economic front, there was very little to sway investor confidence to and/or from Sterling.

However, yesterday’s surprise decision from UK PM Theresa May to call a general election for the 8th of June certainly kick-started the market into overdrive. Sterling made remarkable gains across the board against all its major currency counterparts, reaching 2017 highs of 1.193 and 1.276 against the Euro and Dollar respectively.

Snap election to drive long term Sterling strength

Yesterday’s surge from Sterling shows just how tuned in the currency markets are to political changes from the UK and in this instance, Theresa May’s decision to play her cards early has been greatly received by investors looking to place their funds into Sterling. It looks like the market expect the conservative party to win comfortably, strengthening May’s hand going into Brexit negotiations in years to come and therefore prompting an increase in investor confidence in the UK economy moving forward.

Sterling rates have been heavily anchored by political and economic uncertainty. As such, when the government makes strides to take control and bring stability back to both fronts I expect GBP rates to reverse just as quickly.

Political stumbling blocks to consider

Although it is widely expected that the conservatives will post a dominant display on the 8th of June, there are still a number of political variables which could prompt Sterling to surrender its gains.

First of which is the risk of a second Scottish referendum taking place. May squashed calls from Nicola Sturgeon just a few weeks back, using poor timing as the justification – How will the PM’s political U-turn be viewed now? Furthermore, the polls are projecting a clear and dominant victory for the conservative party by 21 points. Such dominance could potentially sway the UK’s approach to negotiating with the EU and May could face pressure from her own party to soften her hard Brexit approach.

Yesterday evening May insisted she would not participate in any live televised debates. If I were looking to sell my Pounds I would be wary of this step back potentially allowing her political counterparts to snatch this recent vote of confidence from the market away from her. It may be worth capitalising on yesterday’s substantial gains before the next plot twist from the political scene.

Short term data to drive Sterling surge further

At the other end of the currency compass, there was positive economic data that should be well received by Sterling holders. Notably the recent report produced by the international monetary fund, suggesting that the continued spending in the UK despite the Brexit vote has forced them to push their projected growth rate up to 2%. This is the 2nd time in 3 months the IMF have underestimated the UK’s resilience and I am quietly confident investors will gradually take note and bolster Sterling’s value further. It will be interesting to see if the rise is matched in the retail sales figures released on Friday.

I still believe long term Sterling strength is still very much dependent on the Bank of England’s ability to match it’s foreign counterpart’s monetary policies.

It is vital that interest rates are kept in the same ball park as those offered in the US and Europe for the Pound to remain competitive. As a result, if you are looking to buy another currency longer term, be sure to keep a close eye on what BoE’s governor Carney’s speech on Thursday afternoon.

With the Pound at its highest point in over four months, clients with a foreign currency requirement may wish to capitalise on these recent gains whilst markets remain volatile. As weve seen over the last 10 months, political uncertainty can very quickly change the direction of the Pound. Call us on 01494 725 353 or email me here to retrieve a quote. Alternatively, you can set a rate alert here.


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