Financial markets in the past week have had to contend with two UK-borne shocks: The ruling Conservative party’s loss of a majority in last Thursday’s general election and three MPC members voting in favour of a 25bp hike at today’s Bank of England policy meeting.
Sterling, which sold off sharply after the election result, has recovered this week and the more hawkish than expected MPC meeting has given the modest rally further impetus.
Confirmation of an alliance between the Conservatives and DUP, which is expected in coming days, may see Sterling strengthen further, particularly with markets digesting the implications of two further MPC members calling for higher rates.
This would, in my view, present an opportunity to short Sterling versus the dollar or euro, for five reasons:
- Conservative-DUP marriage is not one of choice and arguably not even one of convenience;
- Question of which type of Brexit is unlikely to be answered any time soon;
- MPC has become more hawkish but rate hike still unlikely near-term;
- Concerns over falling wages are at the heart of a UK economy which remains at best soft; and
- EU/eurozone growth slowly picking up and European nationalism on the back foot