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FX round-up: Sterling leaps as markets mark down political uncertainty

By Alexander Bueso

Date: Tuesday 18 Apr 2017

FX round-up: Sterling leaps as markets mark down political uncertainty

(ShareCast News) - Sterling shot higher as analysts said snap elections increased the chances that the UK would not crash out of the European Union, thus helping Westminster clinch a more benign outcome for the economy.
As of 1544 GMT the pound was rocketing higher by 1.51% to 1.2756 after the Prime Minister called snap elections for 8 June, with the Conservative party widely expected to increase its working majority in Parliament.

That meant cable was near its best levels since October, but still well off the 1.4877 it was at on the eve of the referendum.

According to Deutsche Bank's George Saravelos and Oliver Harvey, fresh elections will dilute the influence of those MPs which have been pushing for a Hard Brexit. According to the two analysts, it will also give May more leeway to reach compromises over key EU demands for a transitional arrangement.

"This sequenced approach materially reduces the "crash risk" of Brexit negotiations as well as strengthening the Prime Minister's hand in pursuing an orderly (and very lengthy) withdrawal. All of the above in turn reduce downside risks for the U.K. growth outlook over Brexit negotiations," they said.

The pound was also higher against the euro, gaining 1.06% to 1.1930 while against the Japanese yen it was 1.36% stronger at 138.69.

Analysts at Capital Economics are not entirely of the same view, although they do agree that the level of uncertainty might decrease somewhat from June, hence in their view Tuesday's gains for the pound.

"And while an election is likely to deliver the PM a stronger mandate, it does not make a "hard" Brexit completely clear cut," said Paul Hollingsworth, UK economist at Capital Economics.

Acting as a backdrop, the market implied odds of a 25 basis point interest rate hike by the US Federal Reserve when it next met in June continued to decline.

According to the CME's Fed Watch tool the chances of that have now fallen to 44.1%.

On related note, in remarks to the FT the US Treasury Secretary, Steve Mnuchin conceded that the timeline for the White House's tax cut plans has been pushed back a bit by its setbacks in Congress over healthcare reform.

Together with a surprisingly weak reading on the US consumer prices over the Easter break that saw the US dollar index fall back 0.45% to 99.84.

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