British Pound Will Rise After Election And ECB Meeting

Includes: FXB, UDN, UUP
by: D. H. Taylor


Momentum for GBP has been lost since election announcement.

Polls showing a tight race in election causing consternation with GBP traders.

British economy is expanding faster than the EU and British interest rates will head higher, faster.

The British pound sterling has been taking heavy losses lately as polls narrow in the upcoming election. Theresa May announced the election at the end of April, for June 8. May's thinking was that getting more of a consensus in Parliament would be better for Britain and its negotiations with Brussels over Brexit. But, since then, the polls on the election have narrowed and the wider margin that was drinking the pound has lost its momentum. J. P. Morgan thinks a narrowing of the results, and even a loss for Theresa May, would ultimately be good for Britain. Personally, I don't think it matters. I think GBP is going to strengthen over its Euro Area neighbors.

At first, the snap election was considered good news. Why not? There was not enough consensus. Even I was on board with the election helping the pound. However, I don't think anyone saw how close the election could become; GBP's fortunes have switched to the downside.

I am looking primarily at the economy for now. The first big event is the upcoming ECB meeting. There is an expectation that the European Central Bank will drop its wording about risks weighing towards the downside. I believe the ECB is going to taper out of its quantitative easing program. The exact mechanics are not that important, for now. But EUR will get a rise as the ECB stops buying bonds.

At the same time, however, the ECB was late to the party with quantitative easing. They are late leaving the party. The effects of QE are delayed when you look at them over what happened in Great Britain. The Bank of England started its quantitative easing program earlier. The Bank of England started their QE in 2009, immediately following the financial crisis of 2008. The ECB started in 2015.

Economically, the British economy appears to have recovered faster in light of QE when you compare Great Britain versus the Euro Area, recent downgrade in GDP growth, notwithstanding. Inflation in Great Britain has increased faster than the Euro area. Employment is at record levels in the U.K At 4.6%. whereas the outlier economies in Europe are still questionable. Italy alone has an unemployment rate of some 11.9%.

There is a lot of kerfuffle going on in the FX markets. The ECB may very well end QE before Great Britain. But, interest rates will rise far faster in the United Kingdom over the EU. I do expect EUR to continue to rise with the upcoming ECB meeting and the buildup to that. After the meeting, and after the June 8 British election, that is when I see a very long move higher in GBP versus EUR.

Keep one thing in mind when you look at the relativity of the Bank of England over the European Central Bank: The BoE has a dual mandate of price stability and full employment. The ECB has only one mandate, that being price stability. Inflation has largely been in check in both areas. But, with full employment in Great Britain, the Bank of England may be tempted to push interest rates higher for that one factor. Again, however, the EU has unemployment at 9.7% overall. If price stability remains exactly the same and employment continues to rise in both areas then the Bank of England is going to move before the ECB. Translation: British interest rates are going higher before European interest rates.

In the meantime, these charts look ominous:

The inverted priced level of 1.1400 on GBPEUR is very likely to get tested and I believe it will break. As for GBPUSD, I am looking for a test of the $1,2400 level again. In both cases, however, once these levels are hit I will be looking to go long on the GBP versus these crosses. I am looking for a long term, sustained move higher in GBP versus the crosses over a significant period of time. Eventually, I see the entire move in EURGBP the Brexit vote being erased.

For now, I am waiting for these events to get out of the way before I go in on GBP.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.