Analysts stay steer clear of sterling until dust from UK election settles

There could be period of volatility in the pound-dollar as short-term investors review their options as the outcome of the UK elections remains unclear. Chris Ratcliffe / Bloomberg

The pound’s performance in April, its best month against the US dollar since September 2013, has left analysts lining up to warn of a turnaround after today’s general election.

Sterling climbed 3.6 per cent in April against the greenback, even as opinion polls continued to suggest there would be no overall winner in the election. With the prospect of protracted negotiations likely, the pound could be poised for a decline.

“The outcome of the UK general election taking place today could alter the trading range of the sterling against a number of other currencies,” ADS Securities said in a note.

“Some analysts believe that the market fundamentals, including the reaction of the investors to the new government, may change the appetite for the pound.

“Many political commentators think there will be no clear winner from the election. If this is the case we could see a period of volatility in the pound-dollar as short-term investors review their options,” the note added.

Gaurav Kashyap, a foreign exchange specialist based in Dubai, said that based on how the incumbent Conservative-Liberal Democrat coalition has performed, markets would respond well to their re-election, taking the pound-dollar up to the channel between 1.55 and 1.57. A Labour-led coalition, however, would weigh down forecasts for the pound with a move towards 1.46 to 1.48.

“If you aren’t currently exposed to any pound positions, it would make total sense to await the results before triggering any fresh positions,” Mr Kashyap said.

The currency was at 1.51 against the dollar yesterday.

“The pound’s pre-election performance has been significantly more assured than we had expected, even allowing for the setback over the past few days,” Paul Meggyesi, a foreign exchange strategist at JP Morgan in London, wrote in a client note. That “begs the question of why investors appear to be getting more comfortable with the outcome of the election, even though there has been no material movement in the opinion polls throughout the entire campaign”.

Because of the euro’s recovery, investors should bet on sterling’s decline by purchasing the euro against the pound, according to Mr Meggyesi.

Opinion polls have shown throughout the election campaign that neither the Conservatives nor Labour will achieve a majority, which means they will probably need to depend on the support of smaller parties with different political agendas.

Jameel Ahmad, the chief market analyst at FXTM, said that as “the pound-dollar has previously seen the 1.50 level as psychological resistance and the sentiment towards the pair will be more positive if it manages to extend above 1.50”.

He added: “In the event that the pound-dollar manages to extend above 1.50 and then fall back below, it’s possible that traders will target the pair and try to push it back lower if the UK election outcome is as close as the recent opinion polls suggest.”

The potential for uncertainty pushed one-week volatility on the pound against the dollar, a measure of anticipated price swings, to 16.48 per cent, the most since September’s vote on Scottish independence.

For Société Générale’s Kit Juckes, the low chance of a majority means selling the pound against the dollar is viable, and “the chances of a second election within 18 months are going up”.

Meanwhile, Banco Bilbao Vizcaya Argentaria’s Peter Frank flags the risk of the Scottish National Party holding the balance of power as a downside for the UK currency.

Given the number of results possible, sterling was driven by external factors in the past month, as the euro surged 4.6 per cent against the dollar in its best month since 2010. At the same time, a global selloff in fixed income securities this week pushed the yield on UK 10-year government bonds on Tuesday to their highest level this year.

Robust US non-manufacturing data caused gilts to extend losses made earlier in the day when traders were catching up with global bond price falls from Monday, a public holiday in Britain.

Ten-year gilt yields peaked at 1.989 per cent, more than 14 basis points up from Friday’s close and their highest level since December 8.

Twenty and 30-year gilt yields were subject to similar rises on Tuesday, while the increase for shorter maturities was more modest.

Ten-year yields have risen by more than 40 basis points in the past two weeks, after touching an all-time low of 1.337 per cent on January 30.

“Overall sentiment is pretty bearish across bond markets,” said Nick Stamenkovic, a market strategist at Edinburgh-based RIA Capital Markets.

The stronger-than-expected US ISM survey bucks a recent trend of soft data and raises the chance that the Federal Reserve will increase interest rates sooner rather than later, which is likely to depress bond prices globally.

Mr Stamenkovic said the UK election had reduced liquidity in the gilt market, and played down the idea that pre-election jitters were the main factor behind the sharp rise in yields.

Figures released by the Bank of England on Friday showed foreign investors bought a record £28.8 billion of gilts in March, outweighing net sales in January and February.

Separately, Goldman Sachs Group said the dollar’s steepest tumble since 2011 will not last and investors can profit if they buy now as US growth will improve.

A gauge of the dollar fell 3 per cent in April, the first monthly decline since June and the biggest since October 2011.

Lower-than-forecast data, including first-quarter GDP, fuelled speculation the Federal Reserve will keep US interest rates lower for longer. This week’s payroll report is among economic data the Fed uses to gauge the timing of a rate increase.

Goldman Sachs predicts the US economy will grow 2.9 per cent this quarter, after almost grinding to a halt in the previous three months.

“After the perfect storm in March – a doveish Fed and weak payrolls – price action around last week’s GDP disappointment was a howl of disapproval, something akin to the The Scream by Edvard Munch,” Goldman Sachs analysts, including Robin Brooks, the chief currency strategist in New York, wrote in a report.

“Foreign exchange markets appear to be throwing a tantrum.”

The dollar will likely appreciate 18 per cent to 95 cents versus the euro and about 8 per cent to ¥130 in 12 months, the analysts wrote. That’s more bullish than the consensus calls for the greenback to reach $1.03 per euro and ¥126 by March 31.

The dollar fell 0.4 per cent to $1.1225 per euro in early London trading and was little changed at ¥119.85. Japanese markets were closed from Monday until yesterday for holidays.

The Bloomberg Dollar Spot Index, a measure of the US currency against 10 major peers, fell 0.2 per cent to 1,166.54 after slipping 0.4 per cent on Tuesday when a report that showed the trade deficit expanded to the widest in more than six years.

* with Bloomberg News and Reuters

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