Pound Climbs to 6-Month High After Call for Early U.K. Election

  • Sterling gains versus all G-10 peers as long-held shorts bail
  • Advance casts shadow over USD as Treasury yields also weigh

Is Sterling on a Perpetual Devaluation?

The pound extended gains made during the European session, rising to its highest since early October at 1.2905, after U.K. Prime Minister Theresa May announced a snap election for June. The surge put fresh pressure on the dollar, which stayed near session lows.

Trading flows were lopsided and sterling-centric as the pound rose versus all of its G-10 peers, gaining more than 2 percent against the Canadian and Australian dollars. Strong sterling demand saw traders unwind long-held pound shorts. The election is seen as a chance for May to strengthen her hand as the U.K. enters into Brexit negotiations with the eurozone and after an opinion poll Monday showed the Conservatives with a 21-point lead over Labour.

  • Sterling initially saw choppy trading after the election announcement, dropping to a session low before reversing course quickly. Stop-loss driven buying emerged in layers beginning above 1.2650 and extending beyond 1.2800, said traders in London, Toronto and Europe familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. Stop-loss buying of pounds was also seen as euro-sterling crashed below 0.8400 for the first time since December
  • TD Securities said in a note published Tuesday that while it had forecast GBP/USD hitting 1.29 by the end of 3Q, “the surprise election announcement raises the risk that we see those higher levels sooner.” GBP is likely to start trading more closely with election polls and expected size of the Conservative majority, TD says
    • Near-term, “the French election remains a key risk for EUR/GBP, and we continue to favor downside momentum there”
  • Sterling buying spilled over into the broader dollar picture, adding to weight from a drop in the 10Y UST yield to below 2.20%. The dollar fell vs a majority of its G-10 peers, holding gains against only the Australian and Canadian dollars
  • EUR/USD is trading at ~1.0730, after earlier reaching a session high of 1.0733 as stop-loss buy orders were tripped above 1.0720. Gains have been slowed by EUR/GBP selling
  • USD/JPY is trading at ~108.52 vs session low of 108.35 seen as Treasury yields dropped, the pair relinquishing all gains posted after Treasury Secretary Steve Mnuchin said Monday that dollar strength over the longer-term is a good thing
  • U.S. economic data showed that March housing starts declined to a 1,215k annual rate vs expectations for a drop to a 1,250k pace; prior month data was revised upward, cushioning the disappointment. Other data showed March industrial production rose 0.5% and capacity utilization rose to 76.1%, in line with estimates
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