Treasure Chest | Jun 13 2017
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. After the UK Conservatives failed to win a majority in the election Commonwealth Bank strategists suggest further declines in the GBP are likely.
By Eva Brocklehurst
Heightened political uncertainty in the UK suggests an extended decline in the British currency in the short term. Commonwealth Bank strategists believe a weakened government and soft UK economy confront the official Brexit negotiations that commence this month.
A large current account deficit, at 4.3% of GDP, negative interest-rate differentials and a weakened political position mean there is scope for further depreciation in the GBP/USD. Moreover, the GBP/USD may decline towards US$1.20 if the US dollar unexpectedly appreciates.
A Conservative minority government is a negative development for the GBP and the rally that followed the announcement of the UK general election in early April is likely to reverse. This implies, for the strategists, that GBP/USD will move towards levels around the 200-day moving average at US$1.2576.
The strategists do not believe the election results will change the Bank of England's interest rate stance at its upcoming meeting, and the central bank will look through the current spike in inflation and hold rates steady for the remainder of 2017.
The UK general election resulted in a hung parliament with no party obtaining an absolute majority. The Conservative party achieve 318 seats and this means Northern Ireland's Democratic Unionist Party, which achieved 10 seats, has been drawn into an agreement to form a government. Therefore, Prime Minister Theresa May will have more difficulty placating the varied interests within the Conservatives during negotiations with the European Union regarding Britain's exit.
The strategists believe a minority Conservative government, supported by the DUP, will pursue a more nuanced approach towards Brexit. The market is signalling the DUP favours a “soft” Brexit and a "frictionless" border between Northern Island and the Republic of Ireland.
What constitutes a "hard" Brexit, in the strategists' view, is the UK completely leaving the single market and European economic area. Consequently, the border between Northern Ireland and the Republic of Ireland would become an external border between the EU and the UK, with customs and passport controls.
The EU appears to want to avoid a hard border and the strategists suggest that DUP concerns may be overstated in this regard. Despite the UK political developments the EU's negotiating stance is not expected to change. The EU intends to finalise EU citizen rights for those living in the UK and agree on a methodology that will be used to determine the UK payments to the EU at negotiations which commence June 19.
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