Pound claws back some losses as Theresa May takes over

Sterling climbed the most since three days before Britain’s EU referendum as home secretary Theresa May prepared to take over as the UK’s next prime minister, removing one layer of political uncertainty.

Sterling rose to its highest level in a week against the dollar as investors digested the implications of the new premiership on the UK’s negotiations with the EU over its withdrawal from the bloc.

Ms May is poised to take office by late this evening, replacing David Cameron after her only rival pulled out of the Conservative leadership contest on Monday. The FTSE 100 Index of shares touched an 11-month high.

“Now the way is clear for May” to apply for an exit from the EU, said Thu Lan Nguyen, a currency strategist at Commerzbank in Frankfurt. “There may be hopes that the whole process of uncertainty will be shortened,” he said.

The pound rose 1.4%, the most since June 20, to $1.3185 in London trade, having earlier touched $1.3190.

The UK currency fell to a 31-year low of $1.2798 on July 6. Sterling strengthened for a fourth day against the euro, appreciating 1.4% to 83.93p.

The pound’s recovery this week has barely dented its drop since the June 23 referendum.

Sterling reached $1.50 in the aftermath of the vote, amid speculation the ‘Remain’ camp would triumph, before falling the most on record as it became clear ‘Leave’ would win.

Speculation is also building that Bank of England policymakers will cut interest rates in an effort to spur growth amid signs the decision to leave the world’s biggest trading bloc shook confidence in the economy.

There “seems to be a notion that less political uncertainty is lowering the risk of the BoE turning more aggressive,” said Manuel Oliveri, a currency strategist at Credit Agricole’s corporate and investment-banking unit in London.

In a testimony to the UK parliament’s treasury committee, Bank of England governor Mark Carney defended the institution against criticism it undermined its independence by highlighting the risks of a Brexit. The central bank will announce tomorrow its first policy decision since the historic vote.

Futures’ pricing shows the chances of a rate cut by the Bank of England this week have climbed to 80%, compared with 11% on the day of the EU referendum.

UK government bonds fell, with benchmark 10-year gilt yields rising six basis points, or 0.06 percentage point, to 0.82%. The yield dropped to an all-time low of 0.708% on Monday.

The current level of gilt yields “would suggest 30 years of stagnation,” Mr Carney said in testimony to UK politicians. “But I would underscore that what is happening in markets, there’s a big element which is in our opinion, my opinion, a hedging of downside risk,” he said.