Described as a “game-changer” by Deutsche Bank, British prime minister Theresa May’s decision to call a snap general election was the big story of the day on Tuesday and has reignited sterling exchange rates.
For months Theresa May had played down the possibility of an election earlier than 2020. In the eyes of many of the ruling Conservative Party, there was little chance that the opposition Labour Party could dig themselves out of their current pit of disarray between now and then, and so the Conservatives could carry on as is – without interruptions to Brexit negotiations – and still expect a comfortable victory at that later date.
The markets have taken the news of an earlier election extremely positively.
“The decision to call a snap election on June-8 is not without risk, but given a 20-point lead in the polls, the Conservatives should be able to materially increase their working majority in parliament”, PIMCO’s Mike Amey told Reuters journalists yesterday.
“That in turn would give the government more room for maneuver during the Brexit negotiations, and make the government less exposed to the more right-wing factions within the party”, said Amey.
Having meandered sideways on low volatility for much of 2017, GBP/USD jumped yesterday by 2.25%. The pair was up almost 2.75% at one point in the day.
Technically, the market has also broken from its recent range and hopes are high for a longer-term lift-off in the British currency. Volatility-starved trades will also be elated with a near 390 pip high-low range yesterday.
Against the euro, the pound gained 1.4%, ending the New York session at 1.1971. GBP/EUR had been as high as 1.2048 at one stage, which represents 0.83 in EUR/GBP (a significant support level), but retreated from there.
Switzerland Denies Currency Manipulation
Speaking on CNBC’s Street Signs show yesterday, Jörg Gasser – Switzerland’s State Secretary for International Financial Matters – said adamantly that Switzerland is not manipulating or undervaluing its currency.
In fact, the opposite is true, according to Gasser.
“It’s simply that the Swiss franc is grossly overvalued”, the Secretary said, noting the extraordinary 57% rise in the Swiss franc versus the euro since 2007. The franc has also risen 26% against the US dollar within the same period.
When questioned about the Swiss National Bank’s well-known interventions in foreign exchange markets, Gasser said: “It is understandable that we have to do something about it [an overvalued currency]. They have to keep the Swiss franc on a level that is possible for the Swiss economy to work.”
The necessity for speaking publicly about the matter follows a “monitoring list” produced last week by the US Treasury which names six countries, including Switzerland, as potential foreign exchange manipulators. Under Donald Trump’s “America first” agenda, countries “guilty” of undervaluing their own currencies to gain trade advantages over the US could have tariffs imposed on their exports.
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