UK snap election is adding uncertainty to an already busy EU political agenda
Theresa May surprised markets yesterday as she seeks early general election on June 8. Looking at GBP’s price action, it seems that market participants were quite happy of this decision as the pound rose more than 2% against the greenback, with GPB/USD hitting 1.2905 on Tuesday afternoon.
This sharp GBP appreciation suggests that May’s decision is a good thing for the UK economy. We do not share this optimism as we believe it just increase the uncertainty, particularly in relation the Brexit negotiations and the UK political landscape. Indeed, Theresa May has made a risky but necessary gamble by seeking a direct mandate. On the one hand, it gives her the opportunity to strengthen the Tory majority in the House of Common, which would heighten its negotiations power in the upcoming Brexit negotiations. In addition, it gives her the opportunity to get rid of the 2015 Tory programme.
On the other hand, it gives a second chance to the British people to speak out about the Brexit decision and also gives an opportunity to other parties to make a comeback. Therefore, we think that the market overly reacted to the announcement as the only thing that has increased is the level uncertainty.
Today, the House of Commons will take a decision whether there shall be an early parliamentary general election. According to most media, it is almost a done deal as other parties will not miss the chance to try to get more seats in the House.
In the short-term, we remain cautious on further pound gains as investors will cautious ahead of the elections (if it actually takes place). In the longer-term, a Tory victory would definitely bolster the pound as it will put the country in a better position to negotiate the terms of its divorce with the EU.
By Arnaud Masset