Pound Sterling Steadier On Feet but Political Instability and Risk Loom Large 

"UK political uncertainty is a key downside risk to our new forecasts. We see a high risk that UK PM Liz Truss resigns which suggests GBP can remain volatile and at risk of a sharp fall," - Commonwealth Bank of Australia. 

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The Pound rose against many major currencies during the penultimate session of the week but remains at risk from renewed political instability and uncertainty with all of the possible implications for a UK economy that some analysts describe as being already in recession.

Sterling had climbed back above the 1.12 level against the U.S. Dollar during early trading on Thursday while also rising against most other major counterparts but with European and some Asia Pacific currencies proving to be exceptions to that rule. 

However, the Pound had yet to recover the levels prevailing prior to the departure of the latest UK government minister, Suella Braverman, reports of which were followed by deepening declines across the Sterling exchange rate complex late on Wednesday.

"We now forecast further weakness in GBP amid a stronger USD and our estimate that the UK is already in recession," says Kim Mundy, a senior economist and currency strategist at Commonwealth Bank of Australia. 

"UK political uncertainty is a key downside risk to our new forecasts. We see a high risk that UK PM Liz Truss resigns which suggests GBP can remain volatile and at risk of a sharp fall," Mundy said on Thursday in reference to a projection for GBP/USD to end the year around 1.12.

Above: Selected interbank reference rates for Sterling. Source: Netdania Markets.

Wednesday's departure of former Home Secretary Suella Braverman was followed by chaotic scenes in parliament that have dominated the headlines and was ostensibly related to security concerns stemming from the sharing of a draft policy statement prematurely and using a personal email account.

Downing Street briefings to the political press tell of a government that is riven with division over policy and direction.

Here is Downing Street's version of why @SuellaBraverman's security breach was a sacking offence. 1) the information she sent out related to a new policy to let in more high skilled workers, and stimulate growth - which was relevant to the @OBR_UK assessment of...

— Robert Peston (@Peston) October 19, 2022

That division could be set to grow following the appointment of former Transport Secretary Grant Schapps as Braverman's replacement, given that he has been among the Prime Minister's most vocal critics and one of the so-called 'rebels' on the backbenches of the governing party.

"Political infighting and the uncertainty of policy continue to demand a risk premium for sterling, where GBP/USD could easily slip back to the bottom end of its wide 1.10-1.15 range," says Chris Turner, global head of markets and regional head of research for UK & CEE at ING. 

Above: Pound to Dollar rate at hourly intervals alongside other Sterling exchange rates.

"The wild card is what happens to the top job and whether the re-emergence of former Chancellor Rishi Sunak would represent a steadying of the ship or merely split the Conservative party asunder. One can understand why foreign investors will want to steer clear of sterling until the political environment becomes a lot clearer," he added.

There have been widespread reports throughout October of party 'rebellion' against the current Prime Minister involving former cabinet ministers and many of the unsuccessful candidates from the recent leadership election.

Since this month's sudden departure of the prior Chancellor new appointments to the cabinet have consisted largely of those members of the party.

"Both as a Brit and a global strategist this a farce; a tragicomedy; embarrassing; and a coup by any other name. Obviously it’s a political coup," says Michael Every, a global strategist at Rabobank. 

"Braverman’s angry out-the-door letter made that clear, but at least contained rare dignity: “Pretending we haven’t made mistakes, carrying on as if everyone can’t see that we have made them, and hoping that things will magically come right is not serious politics. I have made a mistake; I accept responsibility; I resign.” How much those words need to be said by *many* others - especially the ones now grinning as they assume power again," Every added.