Danske Bank FX Strategy Research argues that the case for GBP weakness driven by May 8th election risk premium is not strong based on 2 factors:
First, Danske notes that this general election is very much about Brexit and as a large Brexit risk premium is already priced in the GBP and the GBP is already undervalued according to Danske’s medium-term valuation models.
Second, Danske notes that according to the IMM data, investors are very short GBP following the EU referendum last year.
As such, Danske thinks that GBP short covering driven by heightened uncertainty should at least mitigate a GBP risk premium ahead of Election Day.
“Hence, we do not expect GBP to suffer going into the election due to an increase in risk premium,” Danske concludes.
GBP/USD is trading circa 1.2950 as of writing.
Source: Danske Bank Research
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