LOOK OUT – GBP TODAY
At the same time as the monetary policy committee at the Bank of England get ready to deliver their latest decision, the polls in Scotland will already be open. So too the byelection in Hartlepool will be underway with parties on both sides of the dispatch box eagerly awaiting the voters’ decision. What hangs in the balance tomorrow are discussions on tapering and any potential withdrawal of record monetary support offered by the central bank since the outbreak of the pandemic last year and huge political upset. Next week I’ll divulge a little bit more about why central bank support is so critical to a currency and economy and why huge asset purchase programmes are undertaken during times of economic duress. However, for now, to take the importance of such measures slightly for granted, let’s look at the potential influences upon GBP as a result of today’s political and economic crunch points.
In the past couple of weeks, G-10 currencies have proved their sensitivity to any discussion regarding an amendment of financial conditions. As a result of the Canadian Central Bank’s discussion of tighter financial conditions through to Janet Yellen’s impromptu comments on the need to raise rates to prevent price inflation, major currencies have moved considerably on spot and forward markets. For the first time since the pandemic broke out, a considerable portion of the market is now expecting the Bank of England also to mirror or at least allude to the need to taper monetary support. That narrows the path the BoE can take to almost an impossible diameter and positioning on both sides of the market is likely to be adjusted considerably whatever the outcome of today’s monetary policy decision. A discussion on tapering and the conclusion that it is required in the near future will see GBP rally (to the detriment of stocks) likely in a disorderly fashion. Kicking the can down the road once again will leave Sterling closer to its current value against major currencies but still weaker than its closing price yesterday.
In the Scottish election, it is the electoral outcome particularly regarding the performance of the SNP that will be critical to the Pound. The pro-independence party has led the polls confidently with a referendum on Scottish independence the core facet of its manifesto. A strong performance from the Nationalist party or pro-independence coalition would ramp up pressure on Westminster to allow such a referendum. A clear vote for such parties would hurt GBP with the expectation of a challenge to the integrity of the United Kingdom drawing closer once again. Also of particular note on the political front today as local elections take place across the country is the by-election in Hartlepool. With the seat having leaned toward the Conservatives in recent days for the first time ever, a Tory win would be seen to bolster the majority in Parliament and reduce political risk in the UK. Confirmation of this result could provide a tailwind to GBP.
GBP markets have not faced such an intense cluster of risks within a 24 hour period since Christmas Eve as the UK adjusted to news of an unexpected withdrawal of social distancing liberties and a post-Brexit trade deal. Implied volatilities across the FX market are back at post-pandemic lows and current market conditions have not been tested to the extent that they could be over the next 24 hours. This once again raises the risk of a disorderly day in markets. In order to harness this potential volatility, clients with any exposure to GBP should contact our FX desk to discuss deploying appropriate risk management tools for them.
Discussion and Analysis by Charles Porter
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