MARKET APPROVAL
Pound surges to the biggest weekly gain after Tory victory
THE CONSERVATIVE Party’s election victory handed the pound its biggest weekly gain versus the euro since February. That leaves investors free to turn their attention back to UK monetary policy.
Sterling surged the most in three-and-a-half years against the single currency on Friday and strengthened versus most of its 16 major peers as prime minister David Cameron’s majority ended concern that drawn-out talks would be needed to form a government.
Gilts pared a weekly decline and measures of anticipated swings in the currency tumbled.
Cue the Bank of England (BOE). Its monetary policy committee (MPC) is set to give a policy decision today, before the central bank publishes its quarterly inflation report two days later.
“The inflation report is now the important event,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. People thought Conservative government means more austerity, so they’ll price in less action from the MPC.”
The pound’s gains on Friday came after victory with an unexpected majority for the Conservatives, who focused their campaign on their economic credentials and were shown in surveys to be the most trusted party on managing Britain’s finances.
David Cameron won a second term as prime minister after a campaign exploiting divisions between England and Scotland and promising voters a voice on quitting the EU.
Still, some analysts voiced concern that the party’s pledge of a referendum on Britain’s membership of the EU may undermine investment and weaken the pound.
Market friendly “The Conservative Party are perceived to be more marketfriendly than a Labour government and that’s really at the core of the game,” said Sebastien Galy, a New-York based currency strategist at Société Générale.
The pound strengthened 1.8 percent last week to 72.61 pence (R13.34) per euro in London Friday, the biggest advance since the week ending February 27. It rose 2.1 percent to $1.5461, and reached $1.5523 on Friday, the highest level since February 26.
One-week volatility on the pound against the dollar tumbled to 9.8 percent on Friday. It closed at 17.9 percent on May 5, the highest since 2010, amid concern the election would produce no clear winner and spark protracted horse-trading with smaller parties to form a government.
Yields on benchmark 10year gilts rose three basis points to 1.88 percent. The 5 percent bond due in March 2025 fell 0.395, or £3.95 per £1 000 face amount, to 127.905. The BOE will keep its benchmark interest rate unchanged at 0.5 percent today, according to economists in a Bloomberg survey. – Bloomberg