Pound Gains With Gilts, Stocks as Tories Win Surprise Majority

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Conservative Party Leader David Cameron at 10 Downing Street
Conservative Party Leader David Cameron, right, and Samantha Cameron, his wife, enter 10 Downing Street as election results continue to be announced in the 2015 general election in London, on Friday, May 8. Photographer: Jason Alden/Bloomberg

The Conservative Party’s election victory handed the pound its biggest weekly gain versus the euro since February. That leaves investors free to turn their attention back to U.K. monetary policy.

Sterling surged the most in 3 1/2 years against the single currency Friday and strengthened versus most of its 16 major peers as Prime Minister David Cameron’s majority ended concern that drawn-out talks would be needed to form a government. Gilts pared a weekly decline and measures of anticipated swings in the currency tumbled.

Cue the Bank of England. Its Monetary Policy Committee is set to give a policy decision May 11, before the central bank publishes its quarterly inflation report two days later.

“The inflation report is now the important event,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “People thought Conservative government means more austerity, so they’ll price in less action from the MPC.”

The pound’s gains on Friday came after victory with an unexpected majority for the Conservatives, who focused their campaign on their economic credentials and were shown in surveys to be the most trusted party on managing Britain’s finances. Still, some analysts voiced concern that the party’s pledge of a referendum on Britain’s membership of the European Union may undermine investment and weaken the pound.

Election Reaction

“The Conservative Party are perceived to be more market-friendly than a Labour government and that’s really at the core of the game,” said Sebastien Galy, a New-York based currency strategist at Societe Generale SA. “Having said that, with a Conservative government, some people will reassess” their position in the long term on the increased risk of Britain exiting the EU, he said.

The pound strengthened 1.8 percent this week to 72.61 pence per euro in London Friday, the biggest advance since the week ending Feb. 27. It rose 2.1 percent to $1.5461, and reached $1.5523 Friday, the highest level since Feb. 26.

One-week volatility on the pound against the dollar tumbled to 9.8 percent Friday. It closed at 17.9 percent on May 5, the highest since 2010, amid concern the election would produce no clear winner and spark protracted horse-trading with smaller parties to form a government.

Yields on benchmark 10-year gilts rose three basis points, or 0.03 percentage point, to 1.88 percent. The 5 percent bond due in March 2025 fell 0.395, or 3.95 pounds per 1,000-pound face amount, to 127.905.

The BOE will keep its benchmark interest rate unchanged at 0.5 percent on Monday, according to all 41 economists in a Bloomberg survey. Sonia forward contracts show investors are all but ruling out a U.K. rate increase before the middle of next year.

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