The latest events around Brexit made it clear that the potential of forming a Labor government is becoming increasingly high. Early elections, which will lead the opposition to power, may contribute to the fall of the pound to the lowest levels in the last 30 years. In this situation, the ability of the Bank of England to normalize monetary policy will come to naught. Sterling will again be under attack, which will provoke a new "bearish" bias.
In the short term, the growth of sterling is quite possible if the inter-party cooperation leads to a "soft" exit of Britain from the EU. However, the long-term consequences of Labor leadership, as well as high taxes, nationalization of industries and increased in regulation, will complicate the policy of the Central Bank of England. The economic and emotional impact of such a policy probably negates all the achievements of the program to increase the expenses of the current government. Such a change of government would initially cause caution among high-ranking representatives of the Central Bank and as a result, it would push them to soften the policy. For the pound, this is an outright negative.
If you do not take into account the policy, the prospects for tightening the policy in England look extremely weak. Therefore, the serious growth of the pound from current levels should not be expected.
The dovish shift of world central banks, coupled with political uncertainty, should force the Bank of England to be more careful which will leave the pound on a short leash.
Brexit
In the meantime, the sterling reserves the status of one of the most volatile assets of the foreign exchange market. This all happens for the same reason given the uncertainty around Brexit.
The pound rose after Theresa May's attempts to reach a compromise with opposition leader Jeremy Corbin regarding the withdrawal from the EU and after the adoption of the bill banning the implementation of the "tough" scenario. It came close to the resistance level of $1.3180 but then rolled back.
It became known that the European Union no longer intends to give a delay to the United Kingdom's deadline on 12 April. According to the head of the European Commission, Jean-Claude Juncker, Britain should submit an alternative plan to Brexit in the coming days and ask for a long delay or leave the European Union without a deal.
The high risk of indiscriminate Brexit on Wednesday was pointed out by the head of the Bank of England Mark Carney.
"The exit of Britain from the EU without an agreement will not happen intentionally and suddenly. There will be no transition period - it will be a sudden Brexit without an agreement," Mark Carney commented on the situation on Wednesday.
A significant increased risk of disorderly Brexit at any time can provoke aggressive sales of the pound. The target for the GBP/USD pair is still at $1.28 in the long term.
The material has been provided by InstaForex Company - www.instaforex.com