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May 23 - 10:55 AM

SocGen: GBP Outlook Amidst UK Elections

By eFXdata  —  May 23 - 09:30 AM

Synopsis:

Société Générale provides an analysis of the GBP in the context of the upcoming UK general elections scheduled by Prime Minister Rishi Sunak. The election's timing reflects the least unattractive option given the current political climate and recent polling trends. The analysis also delves into the broader implications for fiscal policy and monetary policy differences between the Bank of England (BoE) and the European Central Bank (ECB).

Key Points:

  • Election Timing: Prime Minister Sunak has opted for an election to capitalize on momentarily improving data, despite low Conservative party polling.
  • GBP Stability: The bank forecasts narrow trading ranges for GBP for the remainder of the year, influenced by stagnant European growth and a capped dollar strength.
  • EUR/GBP and GBP/USD Projections: Potential for a short-term dip in EUR/GBP below 0.85, with a gradual rise toward 0.87. Concurrent modest rises in EUR/USD could see GBP/USD remain stable.
  • Interest Rate Context: The BoE has greater leeway for rate cuts compared to the ECB, despite expected delays in rate reductions.
  • Fiscal Policy Constraints: High government spending in recent years might restrict fiscal policy options, potentially leading to an extended period of lower interest rates.

Conclusion:

The UK's political and economic landscape is poised for a period of significant uncertainty. While the forthcoming elections may not fundamentally alter GBP's trajectory in the near term, broader fiscal constraints and the potential for monetary easing could shape the currency's medium-term outlook. SocGen suggests that the low confidence in UK policymakers could ironically set the stage for potential positive surprises, much like the scenario in the 1990s.

Source:
Société Générale Research/Market Commentary

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