UK and GBP: RBS bank expects a political stalemate and recommends shorting of the pound

Although the markets appear to be stable, they have incorporated an additional risk premium due to the UK's elections. An important dynamic is the uncertainty of the impact this will have on high frequency data and the BoE's policy, says RBS.

"What we know for now is that wage growth is still very slow. The latest data suggest that the BoE forecasts (and most of the consensus) are cast aside and this implies pressure on the central bank to raise the declining interest rates. Meanwhile, the EUR/GBP pair has aligned itself with the rate spreads, but at a lower level, suggesting that the negative rates and the ECB balance sheet expansion may now be fully incorporated into price levels", notes RBS.

"So with a potential risk in both directions on the EUR/GBP, keep an eye on the BoE minutes this week to detect a potential change in tone after the slowdown in wages and the CPI", adds RBS.

Overall, RBS recommends that traders remain short on the GBP, as risks of a political deadlock appear to be under-estimated and upward pressure on the CPI remains low.