English Breakfast - Victory or Uncertainty?

Conservatives' strong indicators turned out to be significantly above the voiced predictions
As it was expected, British pound was the celebrity of the previous week, although the results turned out to be better than expected. Doubts were based on the Conservative’s active criticism of the reserved policy, noninterference in a number of problems, and weak economic data. However, in the long run, the Tories took 331 seats in the Parliament, having reserved simple majority, laborists lost 26 seats, and the Scottish National Party strengthened its representation to 56 mandates. Mayor of London Boris Johnson, who is not a part of any party, still managed to get a seat in the Parliament, and is likely, to be the one to replace Cameron in the capacity of the Conservative Party leader.

Retention of the Conservatives' leadership means the following for the royal currency:

  1. Austerity policy will remain the domineering economic technique: in order to handle the budget deficit after 2008 crisis, reach the GDP predicted level per capita and provide economic growth, it is necessary to reduce state expenditures, first of all, at the expense of reduction of unemployment payments, benefits, and free health care costs.
  2. The current technique of tax and budget policy will remain without any changes under stable political climate in order to strengthen the trust of national investors.
  3. Toughening of illegal and labor migration legislation and pushing through corresponding limitation on the EU level.
  4. The Government will continue lobbying large business interests to the prejudice of those of the middle class; that is, in the nearest future, we should not expect any tax increase for the rich, tightening of registration rules for tax residents of Great Britain, and ban on cash assets turnover through offshores.
  5. Success of the Scottish National Party will resume disputes again whether Scotland should remain part of the United Kingdom.

The growth of uncertainty with regard to the issue of the EU membership can be regarded as the negative side in such a decisive Conservatives' victory. The idea of Britain's possible pull out from the EU is not removed from the agenda even under the condition that the latest polls regarding EU status showed 45% "against" the pull out and 33% - "for" it. Great Britain is getting ready for another set of negotiations with regard to some issues, such as illegal and labor immigration, and the threat of the English referendum regarding the EU - an effective pressure tool on Brussels.

Conservatives' strong indicators turned out to be significantly above the voiced predictions. Pound went to the highest level for the last three months at the beginning of Friday, futures quotes for the largest companies of the FTSE100 stock key index grew by 1.8%. The stock market brought back quotes to the pre-election levels. The negative information from the debt market that was actively discussed on last Wednesday and Thursday has not been confirmed. On Friday, the negative yield differential of British and US state bonds reduced by 11.8 of basic points, i.e. investors were still positive regarding the Conservatives' victory. The information pertaining to British economy is not that good to speak about a stable upraise. Weak GDP and consumer spendings data make it improbable for the rates to grow this year; moreover, Euro-QE "killing" EUR is ricocheting at GBP. On Monday, BA predictably kept the volume of asset purchase and key interest rate without any changes. However, it conveyed a message again that the beginning of the process is very close. Meanwhile, it should have been more logical to wait for adjustment of American rates. On Wednesday, we will wait for the publication of the inflation report that must also contain economic growth expectations. Present-day market of forward contracts speaks of the fact that high growth rates have not been included in the price yet. Nevertheless, the main risk factor for British pound has worked itself out and created all conditions for further upward movement (which was confirmed by significant strengthening as early as on this Monday).

Moderately negative NFP for April took active growth factor from dollar. If by the moment of inflation record GBP/USD rate will be at the level of 1.5500-1.5620, and EUR/GBP – at 0.7100 -0.7150, comments will have strong "dovish" tone. Key levels in GBP/USD pair: resistance 1.5640/1.5600, support 1.5500/1.5390. A part of the British negative has already been considered in the price; therefore, any, even slightly positive data, can only support GBP/USD pair upward movement.

Author: Navsher Bartash,
ForexChief Currency strategist