The Pound Is Undervalued and Looks Set to Rally After the U.K. Election

The pound is undervalued and all the signs point to a rally after next week’s U.K. election.

The pound is undervalued and all the signs point to a rally after next week’s U.K. election.

The pound is undervalued and all the signs point to a rally after next week’s U.K. election.

In a bid to break the deadlock over Brexit, Boris Johnson’s Conservative Party won support for a snap general election before Christmas. His opponents hope the election will bring Johnson’s tenure to an end, with Jeremy Corbyn’s Labour Party promising a public vote on a new Brexit deal and the Liberal Democrats, led by Jo Swinson, campaigning to stop Brexit altogether.

Sterling rallied 0.5% to just below $1.30 on Tuesday as Boris Johnson strengthened his lead in the latest election poll and the dollar weakened against a number of currencies. But the pound has failed to trade much higher than $1.29 in recent weeks despite the threat of a no-deal Brexit subsiding. It’s time investors showed a bit more faith in the currency.

The pound has been up and down in recent weeks as investors react to election polls with two fears in mind: a Labour government under Jeremy Corbyn, who has pledged to nationalize major industries and raise taxes on higher earners, and a no-deal Brexit. When it looks like the Conservatives will win a substantial majority—allowing Johnson to get a Brexit deal approved by MPs—the currency has strengthened, while polls hinting at a Labour fightback have had the opposite effect.

While British politics remains unpredictable, those two fears are unlikely to be realized. For starters, all the polls so far forecast a Boris Johnson victory. But even if they’re wrong—and they were back in 2016—the outcome might not be so bad. Even in the case of a slim victory—leading to a hung parliament (where no party reaches the 326 MPs needed for a majority)—or an unexpected win by Labour’s Jeremy Corbyn, the pound still has a good chance to rally because Corbyn would need to rely on other parties to form a government, making it impossible to implement his policies, says Gavekal Research chief economist Anatole Kaletsky.

“Both these anxieties are unjustified,” he writes, even while the markets remain “paralyzed by fears.”

Of course, the pound will perform best if Johnson wins an outright majority. ING’s chief EMEA FX strategist Petr Krpata said a solid Johnson majority — in line with current polls — would see the pound reach $1.33 over the next couple of months. UBS Global Wealth Management said it retained a “bullish view on sterling” and assumed the pound would strengthen to $1.35 with a Johnson majority.

To be sure, the market might become too confident of a Johnson victory. With the polls predicting a Conservative win, attention will turn to the size of the majority a returning Johnson government might hold in the House of Commons. “The market’s conviction over the margin of victory ought to be observed through the pound,” writes Sean Darby, global equity strategist at broker Jefferies. “The stronger the pound the more convinced that the ruling Conservatives will be able to deliver a Brexit deal through Parliament.” If that victory doesn’t occur, the pound could fall.

But there’s no sign of overconfidence just yet, which means pound still has room to rise. “With sterling still trading below $1.30 investors would do well to show more courage,” explains Gavekal’s Kaletsky. “It is time to stop worrying and learn to love the pound.”

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Stocks Videos


    Barron's is a leading source of financial news, providing in-depth analysis and commentary on stocks, investments and how markets are moving across the world.

    Learn More