MUFGs Lee Hardman highlights the Pound as the best performing major currency in recent weeks, supported by higher UK real yields and favourable carry conditions. Markets are reassessing UK fiscal and political risks as Andy Burnham becomes Prime Minister, with expectations of a pro-business and fiscally responsible stance. MUFG judges much good news is now priced into the Pound, limiting further upside.
UK real yields and politics drive Pound
“The pound has been the best performing major currency over the past couple of weeks highlighting that it remains resilient to the negative energy price shock.”
“We have found that pound has been supported by a jump in UK real yields which has made it relatively more attractive and provided adequate compensation for the pick-up in UK political risks.”
“The higher yields on offer in the UK come at a time when financial market conditions are supportive for carry trades given FX volatility is close to year-to-date lows.”
“At the same time, market participants have been scaling back initial concerns over fiscal and political risks in the UK related to Andy Burnham becoming prime minister.”
“After recent strong gains, we believe that a lot of good news is now priced into the pound which should curtail further upside.”