By Charlotte Ryan
Just when it looked like things couldn’t get any worse for the pound, political risks are back on the
Sterling is vulnerable to today’s local elections in England, the resurgence of Brexit uncertainties, and the resignation of one of Prime Minister Theresa May’s key pro-European allies in government, according to strategists.
The currency made a feeble recovery yesterday after five days of losses, as disappointing economic data undermined the prospect of the Bank of England raising interest rates next week.
Political developments “could at any moment blow up to have quite a huge impact because for the last year or so, we’ve never been that far away from another crisis for the Conservative government,” said Jane Foley, head of currency strategy at Rabobank.
“If it looked as if the May government was going through another heightened crisis, the pound would sell off,” while any sign of the UK maintaining a close trading relationship with the EU could support the pound.
While the local elections don’t tend to have a market impact on the scale of a general election, they will provide investors with a reading on how stable the London government is and whether the opposition Labour Party is gaining ground.
A poor performance by Ms May’s Conservative Party could weigh on the pound, according to Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce.
Brexit uncertainty is coming back to haunt the market, with the UK and EU yet to reach an agreement on the border. EU chief negotiator Michel Barnier has raised the possibility of a no-deal Brexit at least twice in the past week. At just over $1.36, the pound has slumped around 5% from its peak reached
on April 17, which was the highest level since the Brexit referendum in June 2016.
Against the euro, it fell to 87.96 pence. It could remain under pressure from political concerns unless a services report also due today beats expectations, according to CIBC’s Mr Stretch.
“It’s possible sterling had been trading with a little too much complacency on the Brexit process, meaning there is scope for the market to be surprised,” Rabobank’s Ms Foley said. She said
sterling has reacted very well to the agreements so far, yet the whole border issue “is a gaping hole”.