Foreign exchange analysts at Danske Bank expect near-term Pound support on political grounds with a convincing Labour victory heralding increased stability while there are on-going French concerns.
The bank still considers that the overall UK economic fundamentals will undermine the currency, especially with an August Bank of England rate cut.
The Pound to Euro (GBP/EUR) exchange rate has retreated to 1.1775 from 22-month highs above 1.19 and Danske expects a net retreat to 1.15 on a 12-month view.
On political grounds, Danske sees scope for the Pound to make headway. Assuming a convincing Labour victory, the bank considers that investors will welcome a period of reduced political uncertainty while uncertainty over the French outlook will hamper the Euro.
Danske notes that energy prices have an important impact on the UK and EU with both securing some relief when prices decline.
The bank is not positive on the overall UK fundamentals, especially with persistent weakness in productivity growth which has been undermined by a lack of investment.
Danske also points out that the UK runs a persistent current account deficit.
Although this has declined to 2-3% of GDP from 5-6% before Brexit, the overall foreign debt has increased to over 30% of GDP and the highest level for more than 40 years.
This leaves the currency vulnerable, especially when risk appetite deteriorates.
