Maybank FX Insight - GBP: Pounding in Election Risks - 21 Apr 2015

GBP: Pounding in Election Risks

       GBP/USD has seen considerable weakness since Jul 2014, tumbling by around 15% to its April 2015 lows of 1.4566 amid political uncertainty and risk of deflation, which has pushed back hopes of a BoE rate hike to early 2016.

       Opinion polls are implying a high likelihood of a hung parliament outcome in the upcoming elections on 7th May. The resulting impact of a hung parliament in 2010 saw a huge decline in the GBP/USD by 6%, despite the Conservative forming the government with Lib-Democrats 7 days after.

       While we are favorable of the medium term outlook of GBP, we caution for potential near term downside pressure on the GBP/USD amid election uncertainty, risk of deflation and current accommodative monetary stance. We see value entering into a 1-month GBP put/USD knockout option with strike at 1.4860, out-strike at 1.4200 for a cost of 45bps, targeting a maximum potential gain of 4.6%.