EUR/GBP: Political uncertainty drives risk premium – Deutsche Bank
Finance EUR/GBP: Political uncertainty drives risk premium – Deutsche Bank Deutsche Banks Shreyas Gopal and Sanjay Raja note that EUR/GBP continues to trade above levels implied by Bank of England (BoE)-European Central Bank (ECB) rate differentials, leaving a measurable risk premium in the Pound (GBP). They argue this reflects ongoing United Kingdom (UK) political uncertainty and higher gilt yields after the energy shock. They also flag upside risks to Bank Rate and rising UK term premia. Pound holds election risk premium “To be sure, if the May election results are sufficiently bad for the Labour Party as to see a leadership challenge over the summer, we would expect these risk premia to remain in place in UK FIC markets. Whether they widen further will depend on the policy platform of any potential challengers, and actual measures taken thereafter.” “In that context, we highlight this recent Financial Times report suggesting that the ”soft left“ of the Parliamentary Labour Party are slowly moving in favour of some welfare spending reforms, which in isolation could be taken as positive by the gilt market, and offer a (partial) offset to any plans for higher spending elsewhere.” “Our basecase is that the BoE does not change Bank Rate, but we have