Pound Sterling Forecast to Open Stronger vs. Dollar, Euro Next Week as Conservatives Get Behind May

Leading figures in the Conservative Party have rallied behind UK Prime Minister Theresa May over the weekend and an analyst tells us Sterling might enjoy a positive start to the coming week as a result.

The British Pound was the worst-performing global currency in the week ending October 6 as markets fretted over the potential for fresh political uncertainty in the UK amidst suggestions UK Prime Minister Theresa May’s tenure at the helm of Government would be challenged.

Fears for May's future peaked on Friday on an attempted rebellion lead by former Conservative Party chairman Grant Shapps. The Pound-to-Dollar exchange rate fell to a low of 1.3027 while the Pound-to-Euro exchange rate fell to a low of 1.1120 as the move injected fresh uncertainty into an already shaky domestic political environment.

But Sterling pared losses into the close of the week as the rebellion was ultimately quashed with additional plotters failing to publicly back Shapps' rebellion.

The weekend sees momentum swing firmly in May's favour as senior Conservative Party figures publicly back May.

The latest senior Conservative to publicly back May is former Prime Minister John Major, a man who knew all to well the pressures of trying to rule as people were plotting to oust him. Major warns the Conservative Party faces crisis unless it backs the "valiant" May.

Commentators believe May has managed to bat off her challenges.

Rising-star and leader of the Scottish Conservative party Ruth Davidson told the prime minister’s critics should “put up, shut up and get off the stage”. This is significant as Davidson is touted as a potential future leader of the party and is well respected owing to her leading the party to its best electoral results in Scotland for a generation.

But more importantly, Foreign Secretary Boris Johnson has since urged colleagues to "get behind" the PM because "people are fed up with this malarkey".

In a WhatsApp message Johnson urged Tories "talk about nothing except policies".

Recall it was Johnson’s issuing of apparently divergent views on Brexit that first prompted a frenzy of speculation amongst the British media that he was likely to challenge May.

Better Week Ahead for the Pound?

There is the real chance Sterling might recover if markets see the challenge to May having been put aside.

"Our short-term financial fair value model estimates show a 1-2% risk premium currently priced into GBP, which suggests that there is a potential for a GBP relief rally if questions over PM May’s leadership credentials abate," says Viraj Patel, an analyst with ING Bank N.V. in London.

ING expect GBP to recover its latest conference-related losses should May cling on and domestic political risks meaningfully ease.

"The narrative will shift back to the Bank of England story, with risks of the UK curve steepening further if Carney & Co support a rate hike with a constructive outlook for the UK economy at the November BoE meeting," says Patel.

So what targets are ING seeing on any potential relief rally?

"Should the Foreign Secretary Boris Johnson leave the Cabinet, markets may see this as drawing a line, albeit temporarily, under the current split within government which many believe is all too apparent. That would be a catalyst for a symbolic relief rally in the pound," says Patel.

The GBP/USD exchange rate is seen rising back to 1.33 and the GBP/EUR exchange rate rising back to 1.1363 (EUR/GBP down to 0.88).

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