Sterling has seen quite a rebound after U.K. Prime Minister Theresa May surprised markets on Tuesday by announcing early elections. The currency surged to a six-and-a-half month high against the dollar on Tuesday trading around $1.28 levels.
While sterling has been driven higher on growing optimism that Prime Minister May will win convincingly, a number of analysts have warned the rally won’t last.
“Firstly, UK data resilience is, to a large extent, reflecting the global growths pick up and we expect to see more sign of divergence over the quarters ahead as high inflation erodes UK real incomes and confidence,” Gkionakis said in a research note.
Secondly, a more unified stance by the UK government is unlikely to improve Britain’s bargaining position in the EU negotiations – in fact, it is likely to produce more friction with the other side, Gkionakis explained.
Finally, he said “once the French elections have concluded – and assuming that Ms. Le Pen does not make it to Elysee – the political risk premium currently embedded in the euro should be priced out. Based on real rate differentials, EUR-GBP is now trading around 6% lower than it should, most likely due to the election uncertainty in France. So, when the latter is priced-out we would expect a swift reversal towards the 0.88-0.90 range.”
But some analysts continue to remain a little more upbeat about sterling. Philip Shaw, chief economist at Investec, told CNBC via email that he expects sterling to hit $1.35 by year end.
Junior Trader Ivan Ivnaov