Pound Sterling Could "Gain Support" on Labour Party Split

 Above: Chuka Umunna is the most high-profile defector from the Labour Party. Image © Labour Party, Sourced Flickr, License Details.

- A Corbyn government seen as a distinct -ve for the Pound

- Split in Labour lowers chance of Corbyn government

- Parallels drawn with the Labour split in 1980s

- One analyst however sees little implications for Sterling

What Does the Labour Party Split Mean for the Pound? In short, it could be a positive for the currency we are told by a number of analysts.

While news of a split in the UK's official opposition has not had any discernible impact on the Pound, we are told that the event could offer support for the currency going forward.

"Sterling may gain support from reports that a group of Labour MPs will announce on Monday they are leaving the party," says Robert Howard, an analyst on the currency desk at Thomson Reuters.

Seven MPs have resigned from Labour in protest at leader Jeremy Corbyn's approach to Brexit and anti-Semitism. The Westminster rumour mill has been been turning over recent days amidst reports that such a split was imminent. The news is therefore by no means a surprise to the market.

The defectors are Chuka Umunna, Luciana Berger, Chris Leslie, Angela Smith, Mike Gapes, Gavin Shuker and Ann Coffey.

Berger said Labour had become institutionally anti-Semitic and she was "embarrassed and ashamed" to stay. All MPs are meanwhile fiercely opposed to Brexit and are united around a call for a second referendum on whether or not the UK should leave the European Union.

That the Labour Party has not adopted a stance calling for a second referendum, but is instead looking to deliver a 'soft' Brexit, has disappointed significant numbers of Labour Party supporters, ensuring a slump in rank-and-file membership over recent months.

According to Howard, the resignations could make it harder for Corbyn to become prime minister after the next general election.

"The received wisdom is that GBP will tank if Corbyn is the next PM, because of Labour's high-spending policies, so anything that lessens that risk should be good for GBP. The next election is provisionally scheduled for 2022, but Brexit developments may lead to its being held much earlier," says Howard.

Ladbrokes has shortened the odds of the next election will be held in May or June this year to 5/1 and 8/1 respectively, from 8/1 and 10/1 a fortnight ago.

William Hill quotes 11/4 for a Labour majority after the next election – longer odds than the 2/1 it quotes for a Conservative majority.

A hung parliament is its 10/11 odds-on.

"The Labour split is the best news Theresa May has had in months. Just look at how the SDP bolstered Thatcher. Conservative share of the popular vote fell to 42% in 1983, from 44% in 1979. But their seat share rose to 61%, from 54%. Tory majority increased by 100," says Samuel Tombs, UK Economist at Pantheon Macroeconomics.

The Social Democratic Party (SDP) formed in the 1980s under very similar conditions: a group of disaffected Labour 'moderates' split away from Labour amidst a surge in radical and confrontational leftist politics that gripped the party at the time.

"Many of the issues — insufficient commitment to Europe, defence policy, left bullying — which drove the new group today were pretty much the same as those behind the SDP and the centrist stance of the new group, as articulated by Chuka Umunna, sounds pretty similar too," says Daniel Finkelstein, a columnist at The Times. The SDP ultimately merged with the Liberal party to form today's Liberal Democrats.

Many currency analysts are of a view a Labour government is seen as a negative for Sterling, largely owing to the high tax and spend fiscal policies he advocates while the Labour's proposed economic reforms, notably the desire to enact a swathe of nationalisations, would roll back on efficiency gains made over recent decades and deter inward investment.

How this Labour Party split influences the Pound will of course ultimately rely on what happens next. Do the rebels form an official party, what kind of support can it expect, which mainstream party has the most to lose?

The immediate impact on Sterling could however be via any shifts to the parliamentary arithmetic when it comes to voting through a Brexit deal before the March 29 Brexit day deadline.

"Has Labour party split made it easier for Mrs May to get a Brexit deal over the line?" asks Viraj Patel, a foreign exchange strategist with Arkera. "Wake up call to Tories over cost of internal rifts & Labour rebels may now back improved May Brexit deal (around 40-60) with the party on the rocks. GBP clinging onto hopes of any deal now."

Simon Derrick, Chief Currency Strategist with BNY Mellon is however sceptical of reading too much into the latest Labour Party split from a currency angle.

Looking at how Sterling reacted to the split of the 1980's, the strategist notes by January 25, 1981 the GBP index was up 33% from its 1978 low. It would rally for exactly another four days. It would then trend lower for the next five years.

"The situation today is very different to that seen at the start of the 1980s so there is little reason to believe that events should play out the same way today. Nevertheless, it’s still interesting to note," says Derrick.

In the meantime, markets will remain fixated on the 'deal' or 'no deal' Brexit question.

UK Prime Minister Theresa May is currently engaged in negotiations with the EU to win changes to the Irish backstop mechanism: that piece of the Brexit Withdrawal Agreement that could ultimately see the UK locked into the EU's single market and customs if ever triggered.

May is this week to commence a series of meetings that would see the Prime Minister meet with every one of her European counterparts over coming weeks in order to try and secure the necessary changes to the backstop that would allow her to sell her deal to a sceptical legislature back home.

"Prime Minister Theresa May is setting off to Europe to “re-negotiate”. What a sad Sisyphean task!" opines Ulrich Leuchtmann, an analyst at Commerzbank. "I cannot imagine that anyone assumes this might result in anything productive."

Leuchtmann says the markets have become more relaxed on the prospects of a disruptive Brexit taking place on March 29, but he believes such signs "despite the grim news... hardly seems justified".

"Any day where nothing happens increases the likelihood of a no-deal scenario," says Leuchtmann.

To see what issues Sterling will be subject to over coming hours, see Pound Sterling 48 Hour Outlook: Key Events that will Guide Price action Against the Euro and Dollar.

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