Deutsche Bank’s Shreyas Gopal reiterates a long EUR/GBP stance after United Kingdom (UK) local elections, arguing that UK political uncertainty is likely to persist through summer. The Pound (GBP) had traded calmly despite a surge in UK political headlines until news about Andy Burnham’s potential path to Prime Minister triggered a sharp move. Gopal estimates EUR/GBP risk premium has risen but not yet reached last year’s pre-Budget extremes.

UK politics lifts EUR/GBP risk premium

"Our main weekend conclusion following the UK local elections was that political uncertainty was set to linger in the background - if not deepen - over the summer, and we stayed long EUR/GBP as a result."

"To that end, this week had already seen the highest frequency of UK political headlines this year, but until Thursday evening the pound had remained comparatively calm."

"Our measure of the risk premium in EUR/GBP has climbed back north of 2% after this evening's spot move, but of course is based on rates pricing from Thursday close before the market-moving headlines."

"From here, and purely for illustration, one combination of market moves that would take the risk premium back to its widest pre-Budget levels would be a further rally in EUR/GBP to 0.8775 in conjunction with a 15bp underperformance of UK (front-end) rates (vs EUR) from Thursday's close."

"As a result, we would expect the FX vol market to place some event weight around potential dates for the by-election (potentially mid-June to early July)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)