Gauging political risk and how it will likely impact the pound remains difficult, according to Carl Paraskevas, Research Analyst at Lloyds Bank.
“Some have interpreted the result of the snap UK general election as positive for the British pound because it will lead to a “softer” Brexit. To prove this empirically, however, is very difficult. Not only are UK and EU negotiations likely to be complex, but a hung parliament may have other unintended or unexpected policy consequences domestically. Uncertainty indices for the UK, like the ones produced by Baker, Bloom and Davis, argue against drawing deep conclusions.”
“Policy uncertainty in the UK appears as elevated as it was before the election. Of course, Brexit and political risk is likely to ebb and flow, or possibly improve over our forecast horizon. There is a long time before Brexit negotiations are likely to conclude. Nevertheless, until any improvement is clearly evidenced, we would expect investors to demand an extra risk premium to hold the British pound.”