Opinion polls for the upcoming UK elections couldn’t be closer. In addition, there is a growing chance of the “worst case scenario” for markets: a Labour-SNP minority government.
The team at RBS focuses on the gridlock and sees downside for the pound:
Here is their view, courtesy of eFXnews:
Although markets appear comfortable they have priced an appropriate additional risk premium for the UK Election, an important dynamic is the impact uncertainty can have on high frequency data and the read-across to BoE policy, says RBS.
“What we do know is that wage growth is still very sluggish. Latest data leave the BoE’s forecasts (and much of the consensus) off-side and imply pressure on the BoE to raise Bank Rate is diminishing. At the same time, EUR/GBP has reconnected with rate spreads, albeit at a lower level, suggesting that negative rates and expected ECB balance sheet expansion may now be more fully priced,” RBS notes.
“So with potential for more two-way risk in EUR/GBP, keep an eye on this week’s BoE policy meeting Minutes for any shift in tone after recent soft wages and CPI data,” RBS adds.
All in all, RBS advises staying short GBP UK as political gridlock risks still look under-priced and UK CPI inflation pressures are soft.
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