The UK election has suddenly become much more exciting, as recent polls indicate a high risk of a hung parliament.
Momentum has turned more bearish GBP and as speculative accounts have cut back on short GBP positions, we could be in for a test of 0.88 ahead of the election.
We maintain the view that if Theresa May consolidates her majority substantially it would be GBP positive. We are looking for EUR/GBP in a trading range of 0.82-0.8650 in this scenario.
If the Conservatives remain in power with an unchanged majority, we expect a relief rally in GBP targeting EUR/GBP at 0.84 post the election. In this scenario we expect EUR/GBP to continue to trade within the current range of 0.84-0.88.
If the Conservatives lose their majority, but remain in power (hung parliament), we expect a knee-jerk bounce in EUR/GBP for a possible test of 0.90. We expect EUR/GBP to settle in the 0.84-0.88 range after some time in this scenario.
We recommend long-term investors and EUR- and DKK-based pension funds with a flexible hedging mandate to gradually build up short EUR/GBP positions (decrease FX hedges on GBP) if EUR/GBP increases above 0.88.EUR- and DKK-based corporates should hedge GBP income via risk reversals.
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