The election is tomorrow
Bank of America Merrill Lynch FX Strategy Research outlines 4 main scenarios for the UK elections on Thursday and the potential GBP direction for each of them.
1- Large Conservative victory (market consensus):
"With market nerves having increased in the final weeks of the campaign, we believe a large Conservative victory would be initially bullish for GBP....Our bias would be to sell GBP rallies," BofAML argues.
2- Small Conservative victory:
"Relative to market expectations, this would be seen as disappointing for GBP and though there would be some initial relief, we believe this would prove very short-lived," BofAML adds.
3- Labour-led coalition:
"A hung parliament with a Labour-led coalition as the only viable option would initially be negative for GBP, in our view. We believe markets will focus on the implication of such a coalition through the Brexit lens....In this regards, any dips in GBP may be seen as buying opportunities," BofAML argues.
4: Labour majority:
"We think the initial GBP reaction is likely to be a steep decline and probably more protracted than in our coalition scenario (GBP TWI -5%). GBP weakness could persist for longer as markets digest the full implication of Labour's macro policies," BofAML adds.
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