Societe Generale analysts report that GBP/USD has edged higher, supported by factors such as lower oil prices, risk correlations, and US Dollar selling driven by Asian foreign exchange intervention [1]. Despite these gains, the team highlights that UK local elections and seasonal patterns in May present significant downside risks for the Pound [1].
The report notes that GBP positioning remains short, and the correlation between GBP/USD and UK 10-year Gilts is less pronounced than during previous market events, such as the November budget or the September 2022 period under PM Truss [1]. Societe Generale also points out that EUR/GBP is trading near four-month lows [1].
Political uncertainty is underscored by the possibility of a devastating election defeat for Labour Party leader and Prime Minister Keir Starmer, which could trigger a leadership challenge. In response, PM Starmer is reportedly planning a speech to emphasize the importance of closer relations with the EU as a means to address the cost of living crisis and bolster economic and national security, particularly in the context of the Iran war [1].
Technical levels are identified, with support for GBP/USD at 1.3450 and resistance at 1.3730 [1]. The report concludes that while current gains in cable are being flattered by external factors, the upcoming local elections and seasonal trends remain key risks to the Pound's outlook [1].
CONCLUSION
Societe Generale highlights that while GBP/USD is currently supported by external factors such as lower oil prices and FX intervention, significant downside risks remain due to UK local elections and seasonal patterns. Political uncertainty and short positioning in the Pound add to the cautious outlook. Market participants should closely monitor election outcomes and related political developments for further direction.