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Sterling has been given another healthy jolt higher this morning, climbing 0.38 per cent against the dollar and sticking around its six-month high hit in the wake of the snap general election announcement this week.
Following an initial wobble, sterling investors have taken comfort in prime minister Theresa May’s plans to seek a stronger mandate for her EU divorce negotiations and bolster the Conservatives’ parliamentary majority in the face of a divided opposition Labour Party.
The pound has climbed 2.3 per cent against the dollar so far this week, its best performance since November and is up over 1 per cent against the euro.
Markets have taken a bullish line on the latest developments in Westminster, betting that Ms May will be on a surer political footing to secure an EU deal by 2019 if she does not face the prospect of an election in 2020.
But hopes the government will now pursue a “softer Brexit” (maintaining access to the single market or the customs union) with a longer time frame are overdone, according to Swiss private bank Julius Baer.
David Meier, an economist, warns the political calculus for the EU-27 has not fundamentally changed by the UK’s snap election. The European parliament will still hold elections in 2019 and EU officials “will surely want to seal a deal beforehand”, says Mr Meier.
There are also few signs Mrs May is willing to budge on her key red lines for a Brexit deal – a limit to immigration and the end of the jurisdiction of the European Court of Justice in UK affairs. According to reports in the UK press, Ms May’s election manifesto will stress a “triple lock” policy on immigration, free movement, and the ECJ.
“We do not buy the argument that markets believe that the Brexit will now be far softer than propagated by May”, said Mr Meier, adding:
There is also no guarantee that newly elected Conservative MP’s will be softer on Brexit. In our view, it is more likely that May is trying to secure political backing in case her hard Brexit plans fail, which, however, would probably end her career as PM instead.
Julius Baer is sticking to its bearish call for sterling against the euro, forecasting that the euro will trade around £0.89 over the next 12 months. It’s now at £0.83.