Pound Sterling Live: "Expect May to be Ousted over the Summer" and the UK Currency to Fall vs. Euro and Dollar
Image © Lee Goddard / Number 10 Downing Street
- Conservative grassroots to meet and discuss making call for May to resign
- May acknowledges she won't preside over another session of parliament
- But Pound bouyed Tuesday on talk of progress in cross-party Brexit talks
Reports out overnight suggest the countdown to Prime Minister Theresa May's departure have begun, and this could make for a weaker Pound Sterling over the summer as the door opens to the next leader of the country who would likely pursue a 'Brexit at all costs' policy.
May is to appear before an Emergency General Meeting (EGM) of all 800 Conservative constituency chairs and senior activists in June, who will decide whether to demand her resignation for failing to deliver Brexit.
May was last night informed that the threshold for a petition to call the EGM has been passed. A total of 70 constituency chairmen have signed a petition to demand an EGM for a vote on May’s leadership which means the 10% threshold had been breached.
"It is the first time in the Conservative Party’s 185 year history that rank and file activists have forced an Emergency General Meeting to discuss the party’s leadership," says The Sun's Political Correspondent Tom Newton Dunn.
May has apparently been invited to address the meeting.
The vote of the EGM is non-binding, but losing it would put significant pressure on the Prime Minister to resign.
According to further reports, May herself believes she will not preside over another session of parliament.
A new session in parliament was due to get underway in June and is usually marked by the official opening of parliament which is addressed by the Queen.
A spokesman for May told the BBC's Newsnight "it is very unlikely Theresa May will preside over a substantive Queen's speech. It will be for the next prime minister to set out their substantive agenda for the next phase of policy making."
But, May says the next session of parliament won’t begin until Brexit is delivered; therefore saying a departure date for the Prime Minister prior to June would not be strictly ture as it appears the government intends to extend the current session of parliament to oversee Brexit.
This could last until October 31, the next Brexit deadline.
However, foreign exchange strategists at a leading Scandinavian bank are telling their clients that the British Pound could come under pressure over coming weeks as political uncertainty is ramped up with the departure of the under-fire Prime Minister.
"May is still under pressure to pass her deal, however, we don’t see a breakthrough anytime soon. Instead, we expect May to be ousted over the summer, leading to another extension beyond October 31. This postpones a BoE hike and should weigh on GBP," says Morten Lund at Nordea Markets.
The British Pound has entered a period of relative tranquility over recent days, occupying well-treaded paths against both the Euro and U.S. Dollar.
The Pound-to-Euro exchange rate has traded in the mid-1.15s while the Pound-to-Dollar exchange rate has been trading either side of 1.30.
However, the rapidly declining volatility in these exchange rates belies the high-stakes political dramas that could be forthcoming.
May survived a second coup attempt last week when a number of Conservative Party parliamentarians attempted to change age-old party rules to allow them to conduct a second no-confidence vote in the Prime Minister within a year. Having survived such a vote in December, May is immune to another vote.
The move by Conservatives to remove the leader confirms growing frustration with her leadership and despair that the Prime Minister didn't opt for a 'no deal' Brexit in order to avoid the lengthy Brexit delay that will last until October 31.
"The extension until October 31 is likely to be marginally more negative than positive for the GBP going forward," says Lund, eyeing potential political uncertainty.
Lund says under such a scenario the Bank of England less likely to raise interest rates, which would deprive Sterling of a key source of support.
Nordea Markets expect the Bank of England to sit tight for the rest of the year and see the next rate hike coming in May 2020, when they believe the Brexit uncertainty will have finally diminished.
With the Conservatives facing a drubbing at the May 25 European elections the party membership sees a change in leadership as offering a path to redemption with voters.
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Triggers to Watch
Two political triggers to watch which could hasten a leadership change over the summer period are the local government elections scheduled for Thursday, May 2 and the European elections on May 26.
A hefty defeat in both could well see the Conservatives heap the pressure on May to leave office.
If May steps down, the UK will enter into a prolonged period of potential uncertainty that could well see a Brexiteer replace her at the helm of the Conservatives and the country.
A new pro-Brexit Prime Minister will be acutely aware that delivering Brexit on October 31 must happen at all costs; if no deal is place the odds of the UK exiting the EU without a deal will rise substantially.
From a currency perspective, the Pound is apparently not prepared for such an eventuality.
"GBP is now priced as if a deal is more or less carved in stone," says Lund. "The perceived odds of a hard Brexit may marginally rise in response to future Eurosceptic leadership candidates."
The British Pound has shown it tends to fall when the odds of 'no deal' Brexit increase, and rise when the threats recede.
Therefore, a change in Prime Minister would open the door to a summer of losses for Sterling we believe.
However, for Nordea's Lund, a change in Prime Minister does not automatically open the door to a 'no deal' Brexit.
"One could argue that with a new Brexiteer Prime Minister in place, the risk of a no-deal could rise again. Although we think this could indeed have a weighing effect on the GBP over the autumn (see more below), we do not deem such a scenario likely. Recall that the final decision does not rest with the Prime Minister nor the Government, but with the majority of MPs who have clearly rejected such a scenario," says Lund.
But the assumption held by Lund that a 'no deal' Brexit will be avoided rests with the assumption the composition of the House of Commons remains more or less unchanged.
We see a heightened possibility that a change in leadership of the Conservatives also dramatically raises the prospect of a General Election as there is a high chance that more Conservative MPs will resign the whip.
Thus the new Prime Minister inherits a government that has no majority to govern.
We see it likely that some remain-leaning MPs would balk at the thought of a more hawkish figure ascending to the Prime Minister's office, one who would rather opt for a 'no deal' Brexit in the event of a parliament refusing to ratify a Brexit deal.
A General Election in turn raises the prospects of a Jeremy Corbyn-lead government running the country.
Analysts suggest that Corbyn's left-wing policies, that include a plan for denationalisation of key industries, would present businesses and financial markets with a period of significant uncertainty.
And, the Pound dislikes uncertainty.
"We turned Negative GBP recently due to markets not pricing the risk of a Corbyn government adequately in our view," says Thanos Papasavvas, Founder & CIO of ABP Invest. "The population is getting fed up with the Tories' constant internal crises and their inability to form policy. Uncertainty to continue!"
In short, we have a cocktail of Sterling-negative events lying in wait this summer should the May step down as Prime Minister.
An Even Longer Extension
Nordea Markets are expecting a leadership changeover, and argue that the contenders for the top job include Jeremy Hunt, Michael Gove, Boris Johnson, Sajid Javid, Jacob Rees-Mogg and Dominic Raab.
It is noted that all the above contenders accepted the Withdrawal Agreement in the third vote, and Nordea Markets suggest this means they will opt to work on a Brexit deal that can pass the House of Commons, rather than opt for a 'no deal'.
"Considering the likely change of leadership, we do not expect a deal to be in place by Halloween. Instead, we expect another extension to March 2020," says Lund. "Looking ahead, this should give a new leader enough time to pass a deal, and with the important negotiations of the EU budget for 2021-2027 needed to be finalised probably in H1 2020, this gives an incentive for both the EU and the UK to find a compromise."
If correct, then the Brexit saga really will become the never-ending story that traps Sterling in an elongated period of uncertainty.
Talk of Progress in Labour-Conservative Talks Buoys Sterling
While Prime Minister Theresa May's leadership remains precarious, the news concerning cross-party Brexit talks is proving supportive for Sterling.
The Times reports "substantive" moves in the Brexit talks between the Conservatives and Labour aimed at breaking the deadlock in parliament over Theresa May’s deal, it was claimed yesterday.
"For the first time in four weeks of negotiations senior Labour sources said that the government side appeared to have shifted its position on the party’s key demands around a closer customs union with the European Union after Brexit. There is also understood to have been some progress over incorporating a revised political declaration with the EU in UK legislation that will be needed to implement Brexit," says Oliver Wright, Policy Editor at The Times.
May's defect deputy, David Lidington, meanwhile said Monday's meeting was "productive" and "positive", saying that both sides seemed to "want to make progress" that would require "flexibility and compromise".
We said in an article published on Monday that the main upside risk to Sterling this week was a breakthrough in cross-party talks as this could go some way in opening a path towards a Brexit deal finally being ratified, which would put an end to months of uncertainty.
While that breakthrough is yet to come, the tone of the updates is more encouraging than those seen last week when talks were reportedly close to collapse.
“There wasn’t complete movement but there was movement,” a Labour source told The Times. “The talks felt different and more substantive in a way that they didn’t last week.”
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