UK: Sterling will remain rooted at the lows for years – SocGen

A political disaster for the Prime Minister and for the Conservatives, that leaves a weakened Government as they enter negotiations with the EU about the terms of leaving the EU is in the making points out Kit Juckes, Research Analyst at Societe Generale.

Key Quotes

“At the time of writing the BBC projects the Conservatives will end up with 318 of 650- seats, 8 shy of a majority but enough to form a minority government, and 12 down on the total when Prime Minister May decided to call the vote.”

“Sterling is supported by valuation – it has now bounced off 73, some 4% below current levels, three times since 1992 – in February 1993, December 2008 and October 2016. We will probably test that level again this summer. That is likely to take GBP/USD to 1.25 but not to 1.20 and EUR/GBP above 0.90 but things have to get even worse before we can ponder levels above 0.95.”

“Soft/hard Brexit is a red herring. In the near-term, the debate will be about whether a minority Government is forced to take a less combative approach and negotiate a ‘softer’ Brexit. We don’t really understand how that can happen. A soft Brexit involves negotiating something akin to remaining in the Single market. The EU position is crystal clear: that requires accepting free movement of people, which is surely unpalatable even to a minority Conservative government. On that basis, any short-covering based on talk of a ‘soft Brexit’ seems doomed to be temporary.”

“In the longer run, what drives the pound will be relative economic performance and policy. A minority government can’t do the kind of damage to the economy a misguided one could do, but as growth slows, the MPC will remain on hold and as others raise rates. The contrast between MPC and Fed or ECB may not be stark enough to trigger a sterling collapse from here, but will anchor it around these long-term historical lows.”