Sterling hit as political problems mount for UK

Sterling hit as political problems mount for UK

Sterling fell for the second day against the dollar and the euro as UK prime minister Theresa May looked set to lose a second member of her cabinet within a week.

In the US, leading shares fell as investors questioned the likelihood of Congress passing president Donald Trump’s tax-cuts agenda soon, particularly in light of a repudiation in this week’s US elections.

Sterling dropped against all of its major peers as Ms May looked poised to fire International Development Secretary Priti Patel, who held several unauthorised meetings with Israeli officials while on holiday, resigned from office yesterday.

The prime minister already lost one top minister last week when Defence Secretary Michael Fallon quit in a sexual harassment scandal, adding to the UK government’s troubles as it struggles to make a breakthrough in Brexit talks.

“In terms of the pound, it’s hard to trade in the short term based on the politics given the various directions these scenarios can go,” said Jordan Rochester, a currency strategist at Nomura International.

The weakness will likely persist until there is greater clarity, and “a lot will rest on any signs of progress on Friday in the Brexit talks and how the political scandal will go before a significant rally can get under way,” he said.

The prime minister is vulnerable to further calls for her to step down, after a disastrous party conference speech last month saw up to 30 MPs reportedly sign a motion for her resignation.

While the reaction in the markets is still relatively muted compared with early October, pound weakness will likely build if Tory rebels rise against Ms May in the next few days, according to Rabobank’s head of currency strategy Jane Foley.

The pound fell 0.5% to $1.3095 at one stage, extending recent losses, which followed disappointing UK retail-sales data.

Against the euro, sterling weakened 0.6% to 88.57p.

The yield on UK 10-year government bonds declined three basis points to 1.2%.

In the US, the focus is on when, and whether, president’s tax plan will take shape.

The Washington Post reported that Senate Republican leaders were considering holding cuts back by a year, while they are also said to be considering repealing deductions for state and local taxes.

The prospect of lower corporate taxes has helped drive stocks to record levels this year.

“There needs to be more a lot more details coming out in this tax plan,” Seán Simko, head of fixed income portfolio management at SEI Investments, said.

Investors are also looking at geopolitics as Mr Trump continues his tour of Asia with a central mission of rallying the world to stand up to North Korea.

“In the big picture it’s all the exogenous events that could happen,” Mr Simko said.

“It’s something you see every day in the headlines. You get North Korea bubbling up from time to time, we heard something in the past two days but prior to that it’s been about two weeks since we heard something from them.

“You have that going on, what’s going on in Spain, you have oil moving higher. It’s a lot of moving pieces right now, like a jigsaw puzzle,” he said.

Since Mr Trump’s election a year ago, the S&P 500 is up around 21%, while the Dow has gained 28.5% in that period and the Nasdaq Composite is up by about 30%.

Bloomberg and Reuters

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