Pound Bears Flee as Deutsche Bank Sees Election as Game-Changer – 18 April, 2017

One of the pound’s biggest bears just threw in the towel.

Deutsche Bank AG, who in 2015 accurately predicted the pound would drop to a 31-year low the following year, is exiting all its bearish sterling trades after U.K. Prime Minister Theresa May called for an early election. George Saravelos, the firm’s global co-head of currency research, described the move as a “game changer,” two months after he warned that the pound could fall to as low as $1.05 in what was one of the firm’s “strongest views.”

Sterling rose to its highest level this year after May’s announcement in Downing Street that she was planning on calling elections for June 8, three years ahead of schedule.

An early election “is in our view a game-changer for both the U.K.’s Brexit negotiations and sterling,” Saravelos wrote. “We do not see the election as a mandate for hard Brexit. Instead, assuming current polling proves correct, it should result in a larger and more stable Conservative majority.”

The pound extended gains soon after Deutsche Bank changed its call. It was trading 1.4 percent higher to $1.2741 as of 3 p.m. in London, the highest since Dec. 6. The currency fell to as low as $1.1841 last year, the weakest since 1985.

Deutsche Bank stood out in 2015 with a call for the pound to decline to $1.27, and has been bearish on the currency for two years. The firm will “look to revise our sterling forecasts in coming days,” Saravelos wrote.

Saravelos identified three reasons why early elections will boost the currency:

• “It makes the deadline to deliver a “clean” Brexit without a lengthy transitional arrangement by 2019 far less pressing given that no general election will be due the year after”
• “It will dilute the influence of MPs pushing for hard Brexit”
• “It strengthens the PM’s overall negotiating stance which in recent weeks has clearly fallen in line with the European negotiating approach”
  • “This will involve a settlement of the Brexit payments and other divorce aspects first, to be followed by a lengthy transitional period during which the final outcome of Brexit will emerge”
  • 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

Source: Bloomberg