Sterling Rally Pauses as May Wins Support to Hold June Elections

Updated on
  • Credit Agricole recommends caution as early gains exaggerated
  • Nomura expects pound to test $1.30 and head toward $1.32

Markets React to May’s Call for a Snap U.K. Election

The pound dropped from a six-month high after U.K. Prime Minister Theresa May won approval from lawmakers for an election on June 8.

Short-term traders faded Tuesday’s move, when sterling climbed above $1.29 to hit the highest since Oct. 3, and losses extended to a session low after the vote in parliament.

“Caution is warranted from here as recent currency upside was exaggerated by a market that was heavily short,” Manuel Oliveri, strategist at Credit Agricole SA, said in emailed comments. While the parliamentary decision was not surprising, it would take higher rate or better long-term growth expectations to sustainably push the currency up, he added.

The pound traded 0.2 percent lower at $1.2821 by 3:45 p.m. in London. Lawmakers backed May’s plan to hold an election three years earlier than scheduled, by 522 to 13. The result triggers what will be an intense seven-week campaign in which the U.K.’s planned departure from the European Union will be the focus.

Banks such as Nomura Holdings Inc. and Bank of America Merrill Lynch now see lower risks for the currency and potential for it to rise further. Nomura expects the pound to test $1.30 against the dollar and appreciate toward $1.32 in the short term. It recommends fading such a move as a ‘hard Brexit’ is still likely and would weaken the U.K. economy, currency strategist Yujiro Goto said in a note to clients.

Technical charts suggest that a pound close this week above $1.2798 would open room for a test above $1.30.

  • On the weekly chart, a close above $1.2798 opens room for test of 55-week moving average at $1.3014; the MA has effectively capped the pair since September 2014
    • Support is at 1.2775, the high on Dec. 6, and at 1.2754, which represents the daily pivot and 1.2706-03, the mid price for April 18
  • Front-end sentiment in cable has eased to its least bearish level since late November; one-week risk reversals trade at 6bps in favor of GBP puts, compared to 32bps on Monday
  • The yield on benchmark 10-year gilts increased 6 basis points to 1.07%
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