By Eamon Quinn
Sterling had another turbulent trading session and is facing into an increasingly bumpy ride in the coming days, after slumping and later rebounding following a report that Brexiteers were plotting to oust UK prime minister Theresa May.
It first fell on a BBC report that a rebel group of MPs in Ms May’s Conservatives had met to discuss how and when they could force her out of her job and then rallied after a pledge of loyalty from Brexit-supporting MPs.
“The pound had a turbulent day of trading,” said Fiona Cincotta, senior market analyst at City Index. “Theresa May could shortly be facing a challenge to her leadership after 50 MPs started discussing potentially calling a vote of no-confidence in the prime minister during the Conservative Party conference in a few weeks,” she said.
“With the government being deeply divided over Brexit the pound is struggling with any kind of rally,” as the Bank of England’s Monetary Policy Committee meets to decide on UK interest rates later today, said Ms Cincotta. Analysts said that given what is happening, with British politics the central bank is expected to keep rates unchanged despite the fact that inflationary pressures are rising.
Sterling ended little changed against the euro at 89.06 pence, and gained against the dollar.
MPs within her party said they wanted Ms May to stay in power despite disagreeing with her Brexit proposals. Rebellious Conservative MPs have condemned Ms May’s plans for Britain to remain in a free trade zone for goods with the EU after it leaves the EU.
European Commission head Jean-Claude Juncker also renewed a pledge of close trade and security ties with Britain post-Brexit.
Analysts said Brexit would dominate sterling trading.“It is clear that the stories about an imminent challenge to Theresa May are still weighing on sentiment and the pound will find it hard to rally too far before more clarity on Brexit emerges,” said John Marley at FX risk management specialist SmartCurrencyBusiness.
Writing before the latest turbulence, Investec Ireland analysts said that “the relentless drip feed of Brexit news is constantly pushing and pulling at the value of sterling”.
“Not for the faint of heart, I think you’ll agree,” the analysts said. Sterling is particularly important for Irish exporters selling across the Irish Sea. The volatile currency can wipe out profit margins on agreed contracts.
While recent signals from Brussels have pointed to renewed confidence that Britain and the EU can agree a deal to govern trading relations after Brexit, divisions within Ms May’s government over Brexit continue to rattle markets.
Positive economic data in Britain published this week, including relatively strong GDP numbers, have been pushed into the background.
Traders say many investors are reluctant to take out big directional bets on sterling because of the uncertainty about where the Brexit negotiations are headed. “The market is very focussed on the immediate and now rather than the future,” said Neil Mellor, an analyst at BNY Mellon.
Mr Mellor said that investors were increasingly confident EU leaders would rally round Ms May to try and secure a Brexit agreement, reflected in the fact sterling had traded away from its 2018 lows against the dollar.
Additional reporting Reuters