The outcome of the UK general election was quite a surprise as the market was broadly anticipating a victory for the Conservatives. Investors had bet heavily that Theresa May would have been able to reinforce her party's support in the House of Commons. Clearly this is definitely not going to happen.
Against such a backdrop, the pound suffered a sell-off with GBP/USD falling as low as 1.2636, down roughly 2% from yesterday. In fact, with the exception of the New Zealand dollar, all G10 currencies moved in negative territory against the greenback. The dollar index rose 0.45% to 97.36 as the single currency slid 0.20%, the Japanese yen fell 0.30 and the Canadian dollar edged down 0.10%.
We maintain our view that the dollar has been oversold, especially after the ECB reiterated a dovish stance yesterday and the political jitters surrounding James Comey’s FBI dismissal in the US seemed to be a non-event. We expect the USD to get some colour back as investors cut their bullish bet on the EUR and risk aversion is eased.
By Arnaud Masset