The brakes are off for GBP – but political uncertainty still lingers
Last week a major hurdle was cleared for GBP with the Conservative party making a surprise election win, which was duly noted by the forex markets. The win has underpinned GBP for the time being, but some political uncertainty still lingers.
Since last week, GBP/USD looks as if it's on track to hit 1.5800-1.6000, with a degree of support also coming from recent USD weakness. Not withstanding that, the Bank of England took some wind out of GBP's sales by revising down UK economic growth prospects and further pushed back expectations of an interest rate hike.
Indeed, if GBP/USD were to clear 1.6000, the BoE is likely to try and talk GBP down due to concerns over the UK's hefty current account deficit and worries about export competitiveness.
Nonetheless, the outlook for GBP is largely positive. A more stable government will support investment plans by companies and the UK economy is still growing well. With the unemployment rate at just 5.5%, the much longed for wage increases can't be far behind, which should support growth and ultimately rekindle some inflation.
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But it's not all positive for GBP. The Conservative majority is actually wafer thin – just 12 Members of Parliament. That leaves the party, which is prone to bouts of self-destruction over Europe, vulnerable to internal rebellions. The positive for the Conservatives is that their opposition is divided and therefore likely to be less effective.
Then there's the 2017 referendum over whether the UK stays in the EU or not. That has been cited as a source of uncertainty, which is effecting the economy. However, the prospect of UK voters deciding to leave the EU, despite their Euro-skepticism, seems quite slim. Generally voters tend to support the status-quo, unless it's unbearable. But a lot can change between now and 2017.
Then there's the Scottish National Party, which won nearly every seat in Scotland. There's likely to be plenty of political drama between them and the Conservatives as they battle it out over the scope of Scotland's autonomy with the threat of another independence referendum within the next five years.
If the economy can maintain its current pace of growth, GBP will probably be able to shrug off these political concerns – unless the Conservatives implode due to internal fighting. But for the moment they're in their honeymoon period, which is certainly bullish for GBP, though in the short-term most of the gains have probably already been made.
By Justin Pugsley, Markets Analyst, MahiFX