FXStreet (Barcelona) - David Bloom, Global Head of FX Research at HSBC Bank & team, argue that this time markets are pricing in the political risk, with GBP/USD trading much lower than the 1.55 level implied by the interest rate differential, indicating that a large discount is now in the price (~6%).

Key Quotes

“GBP-USD should be trading closer to 1.55 based on the interest rate differential but instead is ~1.46; a 6% political discount. Investors seem to have learnt from their experience with the Scottish Referendum back in September, where political risk was largely ignored, with nothing in the price until two weeks before the vote”

“This time around the market has been acutely aware of political risk. When one looks at the interest rate differential a clear gap has opened up. This means the sharp sell-off in GBP-USD has not come alongside a fall in the interest rate differential.”

“In fact, since the FOMC rate decision on 18 March, the expected interest rate in the US has fallen (with the UK rate remaining steady). This should have seen GBP-USD move marginally higher but this has certainly not been the case. With the election drawing ever nearer, it seems that political risk has been attached to GBP”