British Pound Steadies vs. Euro, Dollar as May Resignation 'Hysteria' Starts to Fade

Pound Sterling was the worst-performing major global currency in the week ended October 6 as political instability injects a fresh dose of uncertainty into the UK currency.

However, heading into the weekend Theresa May's premiership looked more assured amidst signs an attempted rebellion by ex-Conservative Party Chairman Grant Shapps had failed. 

The UK currency perked up followed an appearance by UK Prime Minister Theresa May in her Maindenhead constituency where she put to bed speculation that she might resign her position.

May told a press pool that she was looking forward to getting back to work next week and putting forward her domestic agenda to parliament. She adds that she has the full support of her cabinet.

We have seen the pound rise from recent lows on the announcement with GBP/EUR heading to 1.1180 from 1.1155 immediately prior to the announcement.

The gains are hard to get excited about.

"From the darling of September… to the dump of October," says analyst Viraj Patel at ING Bank, summing up the state of affairs for a politically-challenged British Pound.

We wrote at the head of the week that the markets were overplaying the prospect of political uncertainty as per Theresa May’s future - we argued that May was secure in her post and that markets would soon see this.

Of course, this was prior to May’s infamous conference speech.

“The writing is on the wall for May. We can’t just carry on. I think having lost an election the party must look for a new leader to take us forward”, says Grant Shapps, a former chairman of the Conservative Party and minister.

Shapps claims to have to gathered 48 names and intends to take them to No 10 with five former cabinet colleagues to urge May to resign and therefore has been outed as the key rebel in a move to oust the Prime Minister.

The prospect of such an outcome is clearly negative for the UK currency which has suffered tremendously under the weight of uncertainty posed by Brexit and political instability in the UK and this latest development only adds to the pressures.

"While certainly not our base case, a scenario in which PM May steps down – and a Tory Party leadership contest in the near-term – is one that would weigh heavily on GBP," says ING's Patel.

“We think the risk/reward of being long GBP is not attractive and prefer selling into rallies,” says strategist Hans Redeker at Morgan Stanley who says “signs of a split within the Tory Party may weigh on GBP as it raises concerns about PM May's leadership.

The impact on Sterling of the ongoing political uncertainty is notable with the Pound-to-Dollar exchange rate now 2.35% down on the week and the Pound-to-Euro exchange rate down 1.31%. In fact, the Pound has not managed to advance against any of the world's top-20 currencies.

"Another Tory leadership battle would be seriously bruising for the Pound, especially since, at the moment, there is no real clear – or, at least, market-preferred – candidate to replace May. It could help out the FTSE, however, which is enjoying this latest spate of Sterling suffering," says Connor Campbell, analyst with Spreadex.

The UK is currently locked in critical negotiations with the EU over Brexit and a divisions in the UK will only strengthen the EU’s hand.

The prospect of a “no-deal” on Brexit being reached is understandably high.

"The UK government has argued that ‘no deal is better than a bad deal’, but we would expect no deal to be a very bad deal for GBP. The uncertainty unleashed regarding every aspect of the UK’s relationship with the EU would be enormous," says Dominic Bunning at HSBC Bank Plc.

HSBC warn that the Pound is at risk of plunging were the markets to come on board with the view that a no-deal was the most likely outcome of negotiations. The GBP/USD exchange rate could fall to 1.10 under such a scenario it is argued.

But, is the May saga being overplayed as an issue for Sterling?

Some think it is:

 (Polemic Paine is a thought-leader who is widely followed by the trading community).

Indeed, the points raised are important: 1) Even if there is a new Prime Minister the prospect of them seeking another general election are incredibly remote considering the Conservative Party's standings. 2) Short-term disruptions to Brexit negotiations would surely be recouped once a new leader is in place.

So while political risks are weighing on the Pound, beware of overplaying this card.

Despite the negative headlines, Lee Hardman, Currency Analyst at MUFG, says it is not yet clear if there is rock-hard appetite for a change in leadership at the current juncture and the impact on Pound Sterling should therefore be limited.

“Prime Minister May has already survived the disastrous election results which could imply that the Conservatives still view maintaining political stability as the best course of action given a lack of alternatives,” says Hardman.

Nevertheless, "there is clearly a lot at stake for the Pound which will ensure it remains very sensitive to political developments," says Hardman.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.