Pound Sterling's Prime Ministerial Selection: Analyst and Economist Views

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Pound Sterling was wallowing deep in the red against most counterpart currencies ahead of the weekend with dire economic figures and the Prime Ministerial selection process dominating the agenda while eliciting much commentary from analysts and economists. 

Sterling exchange rates were a sea of red throughout much of a Friday session that had gotten underway with the release of dire retail sales figures from the Office for National Statistics covering the month of September.

The data told of a well-established downtrend on the high street deepening to pull total sales back below their pre-coronavirus level in September while also taking a bite out of online sales, which have proven much more resilient thus far in the post-pandemic period. 

These figures were accompanied by other data suggesting that net government borrowing rose by almost one percent of GDP last month and by more than estimates of consensus had suggested was likely, although some economists say the data is not quite as bad as it appears.

Above: Snapshot of interbank reference rates for Sterling as of 1430 on Friday. Source: Netdania Markets. 

The public sector balance sheet is still expected to deteriorate further in the months ahead, however, although the extact extent to which the debt burden grows will be heavily dependent on the policies of the next Prime Minister.

Parliamentary horse trading over three candidates will do much of the work in the process of determining the next resident in 10 Downing Street.

These candidates include former Prime Minister Boris Johnson and a market favourite in the form of Johnson's earliest Chancellor, Rishi Sunak. 

With that, below are some of the latest views from analysts and economists.

Bipan Rai and Jeremy Stretch, FX strategy, CIBC Capital Markets

"By the end of next week, the UK will have its fifth PM in six years. The early contenders here. The process is outlined here."

"Meanwhile, sources indicate that the UK Treasury is likely to delay the October 31st fiscal plan now. That means that the BoE decision won’t have that as an input in its decision on November 3rd."

"So long to Truss’ brand of libertarianism. The “low tax + deregulation, Scandinavian-type services with American-style taxes” was doomed from the start."

"The spectre of former PM Johnson looms large. Despite only leaving office 45 days ago the former PM could make the ballot, albeit if he does we can expect Sterling assets to be compromised."

"Former Chancellor Sunak was the top choice for MP’s in July, his record as a fiscal conservative underlines that he would be best received by the market."

"Retail sales volumes dipped by 1.4% in September, underlines looming recession risks. Weaker-than-expected public finance data underlines the need for fiscal consolidation. Ongoing political and macro negativity allied to the high beta status of the GBP point towards near-term GBP downside and a test of the 13 October low at 1.1058."

Andrew Goodwin, chief UK economist, Oxford Economics

"The resignation of Liz Truss and the Conservative Party's plan for a quick-fire leadership election mean a new prime minister could be in place as early as Monday. But whoever wins the contest, fear of destabilising markets is likely to persuade the new leader to park any policy ambitions that could materially impact the UK's fiscal position."

"The economic backdrop to the latest political ructions has darkened. Inflation rose in September back to the summer's 40-year high, and retail sales fell again, although an extra public holiday played a role in the weakness. Meanwhile, public sector borrowing was higher than expected."

Elwin de Groot, head of macro strategy, Rabobank

"On 11 October, the Economist wrote a blistering column on the “Iceberg Lady” basically predicting she wouldn’t last long."

"Just nine days later, basically the shelf life of another lettuce, that prediction became reality. The prime minister has stepped down." 

"The problem was not so much that Truss and Kwarteng have an almost fundamentalist belief in the market, but they forgot that the markets should primarily believe in them."

"Whilst Johnson is still popular with grassroots Tory members, the process the Party wants to follow is not in his favour."

"Still, if Johnson makes it to the final two, he would probably stand a chance if that other candidate is Rishi Sunak. That is why commentators are betting on a joint-ticket between Sunak and Mordaunt." 

"Whatever happens, the good news is that markets should not have to wait long – shelf life is in short supply these days!"

Stephen Gallo, European head of FX strategy, BMO Capital Markets 

"The speed of recent events suggests we need to think about the prospect of a compressed timeline (we would not be surprised if the 1922 Committee already has a very good idea of the contest winner). The field seems to be narrowing to: Sunak, Mourdaunt, and Johnson."

"Mordaunt and Johnson are the risk-off/cable-off/gilts-off candidates, while Sunak is probably the opposite."

"One plausible result of the first vote, assuming most but not every single MP votes, might be Sunak on 150, Mordaunt on 120, and Johnson on 85. It's also plausible that with this outcome (Johnson out), Mordaunt will concede and throw her support behind Sunak."

"We would however note that this is not a forecast but a plausible scenario, if we are correctly reading in between the lines of what is taking place in Tory party politics."

"The prospect of a Sunak premiership is still cushioning the GBP a bit, but we can already see how the tone in the broad USD, US rates, and risk assets is scuppering GBP's resilience."

"Should those trends persist, the rally on a Sunak win may be barely visible — much to the frustration of our earlier call for a stab at the 1.15-1.17 range in GBPUSD which would have made a fantastic short entry point, in our view."

Ruben Segura-Cayuela, economist, BofA Global Research

"Betfair suggests Rishi Sunak is the most likely PM candidate - we would see that scenario as positive for fiscal credibility and pointing to more fiscal tightening on 31 October, meaning bigger downside risks to our Bank Rate call. But uncertainty is high and alternative scenarios possible."

Elsa Lignos, global head of FX strategy, RBC Capital Markets 

"Turning to the UK’s shortest-lived PM and the race to replace her. Sunak is the favourite in bookies’ markets though Johnson supporters are urging him to stand as an alternative and the former PM rushed back from his Caribbean holiday faster than Kwarteng on a US tour."

"The bookies currently have Johnson in third place, behind Penny Mordaunt – perhaps the members’ favourite at this stage but a relatively inexperienced, unknown quantity."

"From a GBP perspective, the political drama is having diminishing impact, with economic policy reverting to a more orthodox stance."

"Attention turns squarely to the BoE still set on QT and with high demands for the Nov 3 meeting and beyond (240bps of hikes over three meetings). Our longer-term target for GBP/USD remains at 1.04 as it was pre-mini-budget. Difficult times for the UK ahead."

Neil Wilson, chief market analyst, Markets.com

"Markets...not too fussed by it all really as noted yesterday afternoon following a bit of kneejerk response to Liz Truss resigning."

"Trussonomics was already dead – political risk premia are certainly still attached to UK assets but not the full-on Moron Risk Premium."

"Does it matter who the PM is in the end? I doubt it very much matters now – there is not great ideological differences and the experiment with Truss is over."

"Boris might not be terribly keen on spending cuts but the reality is no Conservative government will ever take on the markets now. The bond vigilantes won."

"Boris has the original mandate from the voters and ‘Levelling Up’ is an economic strategy designed to increase GDP per capita. This is important: growth for growth’s sake – importing people, mainly cheap labour, to boost headline GDP (the policy of the last 30 years) - benefits very few."

"Levelling Up sounds like what southern Tory heartlands say to Northern regions to win their support. But it is an economic strategy – or it can be, and it could be once again the way for the Tory party to unite. Forget the ideologues and get on with the pragmatic and the practical."

Joseph Capurso, head of international economics, Commonwealth Bank of Australia

"We consider market participants will view a Sunak‑Hunt government favourably. Under this scenario, GBP could lift back towards 1.1400. Anybody else as Prime Minister would likely encourage GBP lower. But we doubt GBP will re‑test its recent low of 1.0350 any time soon."

Philip Shaw, chief UK economist, Investec

"We are bracing ourselves for another turbulent week in domestic politics and markets, driven by the heightened level of uncertainty. By next Friday however we will know who the new PM is, and hopefully gain some insight into how they and their Chancellor – whether Jeremy Hunt or not – plan to tackle the headwinds facing the UK economy."

"Back in September we commented that Liz Truss would face the toughest in-tray of any incoming UK PM in recent history. In just six weeks this in-tray has become even more challenging. For whoever the new PM may be, there certainly will be no ‘settling in’ period."

Peter McCallum, rates strategist, Mizuho

"Most important in the near-term for the market is what Truss’ resignation means for Hunt’s budget." 

"Hunt seems likely to remain as Chancellor, with Johnson, Sunak or Mordaunt the leading candidates for PM. For the BoE, there’s ongoing uncertainty on what may happen after the energy price cap is reviewed in April 2023."

"From here, over the next couple of weeks we expect the market to lose a little confidence on a 100bp hike in November. However, while the risks are for the BoE to under-deliver, we think the Fed and ECB will be much more comfortable to keep hiking aggressively, at least for the coming two meetings."