British Pound Could Rise vs. Euro if May Stands Down

Image © Number 10 Downing Street

- Sterling selloff extends amidst heightened political uncertainty

- May's exit to wipe away some uncertainty, even if temporarily

- Strategists see prospects of short-term rebound

The British Pound's relentless sell-off against the Euro could extend into its 14th consecutive day on Thursday, May 23, but with political intrigue likely to calm down as voters across Europe head to the polls the prospect of a shallow recovery is growing.

Sterling has been under pressure over the course of May amidst growing political uncertainty that is seen to be raising the prospects of a 'no deal' Brexit on October 31, prompting traders to increase bets against the currency.

Spurring on the uncertainty are reports out Thursday suggest Prime Minister Theresa May will quit office on Friday May 24.

The exit of the Prime Minister has been the subject of feverish Westminster speculation and rumour over the past 24 hours, and has coincided with another extension lower in the value of the British Pound.

However, it is believed the withdrawal of support by May's Cabinet leaves the Prime Minister with little room to manoeuvre.

"Theresa May is expected to announce her departure from No 10 tomorrow after a cabinet mutiny over her Brexit plan," reports Francis Elliot, Political Editor at The Times. "May was finally cornered after cabinet ministers joined the Tory revolt over her offer to facilitate the option of a second referendum."

"Sterling's near 5% fall in the last two weeks should surprise nobody," says Mark Palmer, an analyst at Hamilton Court FX. "We're not back here because we're at a Brexit cliff-edge, we're here because investors only take long bets on a lot of uncertainty if there's the chance of a big pay-off at the end of it."

Palmer explains that given that the best case pay-off of buying the Pound at this point would only be a 'return to normal' it's no surprise people would rather take bets against Sterling and hope for further chaos and a bigger value drop than we've already seen.

May's Departure Could Provide Sterling with Some Support

For Sterling the focus is now on when the Prime Minister stands down, and who the successor will be.

And we are told by a number of foreign exchange strategists that should Prime Minister Theresa May announce her retirement sooner, rather than later, then the Pound could catch a break and recover some lost ground.

"It's getting personal as Theresa May is raising the combative spirit and yet she's the major element of uncertainty for GBP. Therefore, we think a new leader could break down barriers while breathing life into the pound for a short time," says Marc-André Fongern, G10 strategist with MAF Global Forex.

That the Pound dislikes uncertainty is unsurprising, and the same rule can be applied to all currencies.

There is an abundance of uncertainty to keep foreign exchange traders occupied at present: there is a growing, almost overwhelming, opposition to May remaining in office from Conservative MPs as well as her own Cabinet.

Above: Don't fight the trend. The Pound's record consecutive daily losing streak against the Euro.

The Pound-to-Euro exchange rate fell 1.1311 in mid-week trade as the scale of the opposition to May's final pitch to pass a Brexit deal through the House of Commons became evident. 

The Westminster rumour mill then went into overdrive as speculation on whether May would resign grew: this corresponded with the Pound coming off its lows vs. the Euro and the exchange rate recovered to the current 1.1336 levels.

Currency strategist Viraj Patel at Arkera said there was evidence the bounce was due to rumours that the Prime Minister would stand aside that night.

Further pressure was heaped on May when Commons Leader Andrea Leadsom last night quit the cabinet, in what amounts to the most high-profile resignation suffered by May's government for some time.

Leadsom appears unwilling to take May's new Brexit deal legislation to the House of Commons, as it is believed she strongly disagrees with its contents.

Should May resign, the current political uncertainty would fade and focus then turns onto the process of selecting a new leader.

Currently, bookmakers are favouring Boris Johnson to take over May's position.

"I think Johnson as PM isn't as bad as many market participants assume. Of course it wouldn't change the current pound-arithmetic much, but it's somewhat possible we could see a change of atmosphere," says Fongern.

"We will not have more certainty before May steps down and domestic politics is reshuffled. Either candidate may indeed show to be more pragmatic but for now a bit more Pound volatility has been introduced," says Jakob Christensen, Chief Analyst at Danske Bank.

The scale of the drubbing the Conservative Party suffers at the hands of Nigel Farage's Brexit Party in Thursday's European Union elections could well determine when May goes.

Some speculate May is waiting for the results to come through before making the call.

For Sterling, the downtrend is now firmly entrenched and, from a technical perspective, would be expected to continue.

However, markets are unpredictable and some would say to be wary of a recovery.

"In the midst of chaos, there is also opportunity. Very much applicable to GBP markets right now. Pound trading with large degree of political risk premium. GBP typically bounces back once eye of the Westminster storm passes," says Arkera's Patel.

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