Sterling faces ‘choppy’ trade on Theresa May leadership

Sterling slid for a second day as the markets weighed up the potential Tory challengers to UK Prime Minister Theresa May’s leadership and warned of more “choppy” times ahead.

Sterling faces ‘choppy’ trade on Theresa May leadership

Sterling fell 0.5% against the dollar to $1.305, and the euro gained 0.6% to 89.8 pence as rumours swirled at one stage about Ms May’s imminent resignation.

A weaker currency boosted some UK shares.

“Further losses for sterling continue to lift the Ftse 100, but this morning’s coup against the prime minister seems to have fizzled into nothingness, meaning that, for now at least, the UK political situation remains relatively stable,” online trader IG said.

Alan McQuaid, chief economist at Merrion Capital, predicted stability will be short-lived in the coming weeks as sterling is pulled between the opposing forces of the political “circus” surrounding the Tory Party and Brexit and the support for the currency from any Bank of England increase in interest rates by the end of the year.

Political events could weaken sterling to over 90 pence, while a Bank of England rate increase could bring it back below 90 pence though the outlook for the currency under all circumstances was “choppy”, he said. With Ms May’s authority weakened and about 30 party members reportedly calling for her resignation, the pound was feeling the heat, and was set for its biggest weekly drop in a year.

Sterling would, however, crash to its weakest in 32 years, if Jeremy Corby’s Labour Party were to win the next UK election, while the elevation of Brexit Secretary David Davis to prime minister would represent the best prospects for the currency, according to a Bloomberg compilation of the views of currency analysts.

The pound could recover to around $1.31 to $.32, “but not in a quick fashion given uncertainty is likely to linger every time she faces struggles,” said Nomura International analyst Jordan Rochester, while CIBC’s Jeremy Stretch sees sterling drifting below $1.30.

Sterling will “recover its latest Tory-related losses should May cling on and domestic political risks meaningfully ease,” said Viraj Patel, a currency strategist at ING Bank as “the narrative” shifting back to the Bank of England and a possible rate hike.

Under this scenario, ING sees sterling trading to $1.33 and the euro falling back to 88 pence. Sterling will fall to $1.25 if Ms May resigns and a leadership race is triggered, said Neil Jones, an analyst at Mizuho Bank. But the prospect of a long drawn-out leadership contest that could see a pro-Brexit campaigner replace Ms May is “not good for markets and not good for the negotiations and would send sterling clearly lower,” according to Mr Rochester at Nomura.

“While certainly not our base case, a scenario of PM May stepping down — and a Tory Party leadership contest in the near term — could see the pound getting quickly dumped, with short speculative positions being rebuilt after the recent neutralisation,” according to Mr Patel at ING.

Mr Davis replacing Ms May without a leadership election is “still negative, but less so than the others as it rules out the hardest and most antagonistic Brexit candidates and makes another election less likely,” said Adam Cole, Royal Bank of Canada’s global head of currency strategy.

  • Additional reporting Bloomberg

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