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Analysts at MUFG Bank point out that the GBP/USD pair approaching 1.3000 reflects lots of good news on political risk and basically largely ignores other aspects. They see downside risks for the pound, particularly from the weakening fundamental backdrop.

Key Quotes:

“We continue to hold our short GBP/USD trade view and our stop of 1.3000 was close to being hit earlier this week GBP buying was fuelled by optimism over the Tory Party being on track to win a parliamentary majority in the upcoming general election on 12th December.”

“There is little evidence of yet of a Labour Party surge in the polls like what took place in 2017. Indeed, a surge to within 5ppts like in 2017 is unlikely this time we believe but where do the risks lie from here? With the Tory Party in some polls ahead by 15-17ppts, the risk is still that the Labour Party make advances over the coming weeks.”

“The Tory manifesto has not yet been released (Sunday possibly), so weekend polls will be clear litmus test of whether the electorate view them favourably. If so, another hit to the pound will follow next week.  

“The fundamentals continue to deteriorate as was evident in the PMI Composite Index, which fell to 48.5, the worst print since just after the Brexit referendum in 2016. This new flash report (85% of responses) is flashing GDP contraction and strongly  indicating the spreading damage of not just Brexit but global trade uncertainties.”

“The sharp reversal of GBP yesterday and today highlights a lot of good news being priced at levels approaching 1.3000 and we see a greater risk of the Labour Party closing the opinion poll gap than the Tory Party extending the gap further. Combined with a possible escalation in global trade uncertainties due to US-China tensions reemerging and given weak UK fundamentals, GBP weakness could extend further.”