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Pound Sterling will Either Surge or Crash in 2020: HSBC's Bloom on Sterling vs. Euro and Dollar

David Bloom HSBC

Above: David Bloom, Global Head of FX Strategy at HSBC. File image. (C) Pound Sterling Live. Still courtesy of Bloomberg.

- Pound-to-Euro exchange rate @ 1.1669

- Pound-to-Dollar exchange rate @ 1.2846

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- Pound could go as high as $1.45 in 2020

One of the City of London's leading foreign exchange analysts, David Bloom at HSBC, has said he expects the upcoming election to have a dramatic impact on the value of the British Pound.

Speaking in an interview on Bloomberg TV, Bloom said "nothing is currently priced" into the value of Sterling at the present time, and the election outcome, "could have dramatic impacts on Sterling and on the 13th of December, whatever Sterling is trading at now, it will not be trading at on that day."

"What you have now are scenarios, you don't have a view. You can't have Boris Johnson and Jeremy Corbyn winning, and a hung parliament. We don't know which one it is, so you have got three different views out there," says Bloom.

The Pound has been tracking the odds of the Conservative Party achieving a majority when the UK goes to the polls on December 12, rising above 1.29 against the U.S. Dollar and above 1.17 against the Euro when the odds of such an outcome reached 70% with the bookies on Monday. Sterling then experienced weakness on Tuesday as those odds slid back to 66% on Tuesday following a number of polls that suggested the gap between Labour and the Conservatives was closing.

The odds have since fallen back on the back of polling that shows the Labour Party is closing the gap on the Conservatives, and the value of Sterling has obliged and gone lower in response.

"So how can you price anything in, it's very difficult when you look at the opinion polls and you work it out simply it looks like a Conservative majority but it's not that simple it's quite a complicated set of circumstances and it's still completely open, anything can happen," says Bloom.

The HSBC analyst says forecasting Sterling in the current environment is a difficult proposition, as "you could obviously have Boris with a majority, you could have a Remain coalition, you could be back in a hung parliament and then that's a disaster as well."

Of the various outcomes that might be forthcoming from the December 12 vote, what is the most damaging for the Pound?

Bloom says a hung parliament would be the most damaging outcome for the Pound, while a small Conservative majority, what Bloom identifies as "the Theresa May thing", could also leave markets uncertaint as to the political outlook.

A hung parliament could well prove that the Brexit question cannot be answered by a General Election, and a hung parliament might presumably not offer a clear route to a second referendum either.

Under such an outcome, "we are back in the mud," says Bloom, and Sterling then starts trading at roughly 1.20 (vs. the Dollar) because we don't know where to go, we don't know what to do, we're lost in the wilderness."

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Spend Spend Spend

And how do the fiscal policies of the major parties play out for Sterling, whether under a Conservative or Labour government scenario?

"A boost to the economy through the fiscal side and rather than a the Bank of England having people vote for rate cuts you could have a Bank of England voting for rate rises, and that causes Sterling to go up, so I think a fiscal boost is very good for the currency, we saw that in the United States last year, a big boost from the fiscal side, the central bank responds by raising rates and the currency powered ahead. So, as far as I'm concerned the fiscal boost will be Sterling positive," says Bloom.

Both the Labour Party and Conservative Party have committed to opening the purse strings at the Treasury should they win, with both looking to put the past ten years of 'austerity' behind them in order to coax voters to back them.

However, it is certainly the Labour Party that will outspend the incumbents if they grab hold of the levers of power.

Analysis by Sky News shows that for every £1 of day-to-day extra spending pledged by the Conservatives in their manifesto, Labour are promising an extra £28.

"And that's before one adds on the cost of providing extra money for women denied state pensions - the so-called WASPI women," says Sky's Economics Editor Ed Conway.

 

Deal or No Deal

Asked on the longer-term trajectory for Sterling actually looks like, Bloom says the resolution to the Brexit question remains the key to the outlook for the UK currency:

"I really think it all balances on 'deal' or 'no deal', that's a complete game changer for the future of the UK. If we get a deal we're saying we will power ahead, suddenly you take politics and you switch it off for a while and there is a fiscal boost and Sterling is cheap and all that investment that wants to come into the UK, house prices go up and it's off to the races and you're galloping away, beautiful, we could eventually by the end of next year be at 1.45 (vs. the Dollar)."

While no major political party is currently campaigning for a 'no deal' Brexit, Bloom says it remains a possibility that Sterling is exposed to.

"You get 'no deal' and we've got the problem of some kind of recession possibly in the UK, all sort of problems politically and investment doesn't come in, and you're already at 1.10," says Bloom.

The outlook for the Pound therefore remains resolutely dependent on the political resolutions delivered by the electorate on December 12.

"You can't have 1.45 and 1.10, the political outcome will determine the future of the currency and so I can't make that political decision, I can try and say what I think the currency will do under that political scenario. But you have to come up with the political scenario, and I'll do the numbers," says Bloom.

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