Upgrades to Pound Forecasts are Coming say Credit Suisse

Credit Suisse are the latest big name in institutional research to say they are to revisit their forecasts for the British Pound.

In a note to clients dated April 19 Credit Suisse say they are looking to bump up their forecasts for Sterling following “the latest ‘out of the blue’ event that is Theresa May's decision to call for a UK general election on June 8.”

The move has been well received by GBP, “based on the thesis that the Conservatives are likely to win by a landslide and have a clear mandate to push through Brexit negotiations without too much inconvenient domestic opposition,” say Credit Suisse.

What does this mean for the Swiss bank’s forecasts and trades?

Three weeks ago Credit Suisse upgraded their three-month and twelve-month Pound-Dollar forecasts to 1.25 from 1.20 previously.

“We argued that GBP/USD is trader a wider 1.20-1.30 range, and had favoured fading the extremes,” say Credit Suisse. “With the latest developments, we are inclined to revise higher our GBP forecasts vs USD.”

This comes against a backdrop of Euro to Pound forecasts at 0.88 and 0.90 for the same timeframe.

This equates to a Pound to Euro profile of 1.1363 and 1.11.

Credit Suisse argue the case for raising their forecasts for the Pound are compelling on the view that short GBP has been a structural position in the market and is now an exposed one.

'Short GBP' refers to the case whereby speculative traders are engaged in bets that further downside is coming. Being 'long GBP' would mean traders are engaged in bets the Pound is to rise.

In short, a wholesale shift in investor opinion would restructure the market in Sterling's favour.

The revised targets will be released in coming weeks.

“We will hold off doing so until after the French elections to get more clarity on the EUR story and by extension the all-important EURGBP cross rate,” say Credit Suisse.

The Thinking Behind the Upgrades

Credit Suisse have based their call for a more robust Sterling profile on the assumption that an easy Conservative win with a large majority is indeed the election outcome.

Analysts say this is not unreasonable based on the latest polls, presumably this would also allow PM May more degrees of freedom to negotiate a softer form of Brexit than the market currently feels is achievable.

The thinking goes that a large majority won directly by PM May would leave her much less vulnerable to rebellions from hawkish factions than she is today, given she currently has only a slim and inherited majority now.

Analysts argue the same PM May was also a "remain" supporter who presumably only “reluctantly” is driving Brexit through having triggered Article 50 last month, at least based on her original position.

“As such, there is also room presumably for PM May to again ‘reluctantly’ decide that the pledges she made last autumn are no longer in the national interest if they would lead to a disruptive form of Brexit,” say Credit Suisse.

“Simply having to price in higher odds of this series of events going forward are GBP positive in our view, even beyond the possibility of stable government being more likely.”

Then there is the Scottish element of the debate.

Credit Suisse believe the June election could also pose a tricky test for the Scottish National Party.

“After all, it will be hard for the SNP to better its 2015 general election showing when it took nearly every Scottish seat in the UK parliament,” says the note. “Anything that falls short of that in June would allow PM May to attack the legitimacy of new moves towards a fresh Scottish independence referendum as SNP leaders have pushed for, again helping GBP on the margin.”

Sterling's "Crash Risks" Reduced

Perhaps the biggest bear to turn more positive on Sterling since May called for the June poll are Deutsche Bank who have for a while now been suggesting the Pound to Euro exchange rate will likely fall to parity at some point on the tortuous Brexit journey.

However, the landscape has shifted somewhat and Deutsche Bank do not see the election as a mandate for hard Brexit as many political opponents to Theresa May have suggested.

"Instead, assuming current polling proves correct, it should result in a larger Conservative majority. This will have three material implications, in our opinion," says analyst George Saravelos.

The three implications are as follows:

"First, 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.

"Second, it will dilute the influence of MPs pushing for hard Brexit, strengthening the government's domestic political position and allowing earlier compromise over key EU demands for a transitional arrangement.

"Third, it strengthens the PM's overall negotiating stance who 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."

Satavelos argues 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.

All of the above in turn reduce downside risks for the U.K. growth outlook over Brexit negotiations.

"We have been structurally bearish on sterling for the last two years but are now changing view. We are closing out all our bearish FX trades. We intend to review our sterling forecasts in coming days,” says Saravelos.