The Pound Today: May Exit Announced | Sterling Short-Term Reprieve vs. Euro and Dollar Forecast
Prime Minister May announces she is to step down on June 07. Image (C) Pound Sterling Live
– Snapshot: GBP/USD: 1.2671 +0.07% GBP/EUR: 1.1333 +0.12%
– May lays out exit timeline
– Conservative leadership campaign tipped to start June 10
– Sterling could see near-term relief, but tough summer ahead
Pound Sterling is seeing some welcome relief ahead of the weekend with some modest gains being recorded against the Euro, Dollar and a host of other major currencies, but how the under-pressure Pound ends the week will ultimately depend on the market’s reaction to Prime Minister Theresa May’s exit strategy which has just been announced.
May will resign on Friday, June 07.
May set out a timeline for her exit following a meeting with Sir Graham Brady, the Chairman of the Conservative Party’s 1922 Committee.
In a statement delivered on the steps of Downing Street May said she is standing aside following three failed attempts to get a Brexit deal through parliament, and she believes a consensus on the matter can still be found.
The resignation was highly-anticipated and therefore the Pound will have priced in the event over recent days.
The event nevertheless marks the high-point of a frantic three weeks in British politics: Sterling has been under pressure since early May as it became increasingly clear a political shake-out was imminent and that it would not be Theresa May who was in charge of the country on October 31, the day the UK is set to leave the EU.
“The resignation of Prime Minister Theresa May supports our recent view that the chances of a Brexit deal have fallen and that the chances of another delay and a no deal Brexit have risen. While the financial markets have probably already priced this in, with concerns over the global economy also rising, we believe that the downside risks to the Pound (even though it initially rose on the news) and gilt yields are growing,” says Paul Dales, Chief UK Economist with Capital Economics.
On the back of growing political uncertainty the Pound-to-Euro exchange rate has fallen from 1.1776 down to current levels of 1.1333 in an uninterrupted run of 14 consecutive days of losses: a record for the pair.
The Pound-to-Dollar exchange rate meanwhile fell from highs at 1.3177 in early May down to current levels of 1.2674.
We consider the Pound’s outlook from two perspectives: the short-term, which covers coming days, and perhaps the next week or two, and the medium-term, which covers the summer period.
Our suspicion is that in the near-term we could finally see the selling pressures on Sterling relent, purely because by setting out a departure timeline May will have provided markets with some degree of certainty on the way forward.
“Provided that Theresa May leaves as quickly as possible, the Pound could see some sort of recovery near-term,” says Marc-André Fongern, a strategist with MAF Global Forex in Frankfurt. “It would be advisable to await the state of affairs before adopting a new attitude towards the Pound … we are slightly positive that the currency can pick up some momentum once Theresa May has resigned. At least for a short time!”
It is not entirely unconceivable that the market adopts a wait-and-see approach to the Pound once May has announced her departure. Looking back at Sterling’s performance since the 2016 referendum, the Pound tends to enter into stubborn sideways trends in such an environment, particularly against the Euro.
We would not be surprised to see a few days, or weeks even, of sideways action, particularly against the Euro.
But the currency must of course find a floor first: and suggesting we are at the floor now is too hard to say.
Indeed, looking at the medium-term timeframe, further downside for Sterling is likely as markets will likely be spooked by the rhetoric coming from the Conservative Party leadership contenders, all of which will almost certainly strike a robust tone on Brexit.
“We think Conservative leadership elections are likely to extend pressure on Sterling. While it should be partly priced in by now that a Brexiteer will likely follow Theresa May as prime minister, a change that would increase the risk of a no-deal Brexit, we expect headline risk to increase nervousness among investors and lead to a rise in volatility,” says Kathrin Goretzki, CFA, FX Strategist with UniCredit Bank in London.
What Boris Johnson, the current favourite, says will be of particular importance.
“The bookies favourite Boris Johnson may appeal for some, yet for markets the prospect of a bumbling Brexiteer does not look enticing. The chances of no-deal Brexit or a general election both rise with May’s resignation, and looking at the Pound this week, markets certainly know that,” says Joshua Mahony, Senior Market Analyst at IG.
The overall trend in Sterling remains lower and with a summer of jostling amongst Conservative politicians for the top job we would expect the potential for further declines.
“The temptation to support a leader who has expressed a willingness to consider a ‘no deal’ Brexit could be strengthened by the strong public support for Nigel Farage’s new Brexit party,” says Mark Haefele, Global Chief Investment Officer GWM at UBS. “Investors should not be complacent about the threat of a ‘no deal’ exit.”
UBS believe a ‘no deal’ would take the Pound as low as 1.15 vs. the Dollar and 1.03 vs the Euro.
Johnson’s campaign for the leadership has gathered steam this week and the ex-mayor of London now has the public backing of at least 10 MPs including Jacob Rees-Mogg, the chair of the European Research Group, Zac Goldsmith, the former London mayoral candidate, and John Whittingdale, the former culture secretary.
Johnson gained the backing of two more significant endorsements on Thursday after Johnny Mercer, who had been considered a leadership hopeful himself, and Gavin Williamson, the former defence secretary who sees himself as something of a ‘king maker’, made public their support.
The new Prime Minister will inherit an unresolved Brexit, and a looming deadline in the form of the October 31 exit date that should heap pressure on the fledgling administration.
Of course, the new leader is by no means guaranteed a parliamentary majority as some ‘remainer’ MPs could choose to quit rather than serve under a Prime Minister who would consider a ‘no deal’.
It is widely expected that the next Prime Minister would look to reopen negotiations with Europe, and should this fail, opt for a ‘managed no deal’ Brexit.
Therefore a General Election and a Corbyn administration cannot be ruled out before 2019 ends.
“Our longstanding position has been that some combination of a ‘no deal’ Brexit and/or early elections will continue to weigh on the GBP, so we continue to expect a political risk discount to remain embedded in the currency,” says Stephen Gallo, foreign exchange strategist with BMO Capital.
BMO Capital forecast Sterling to be at 1.22 against the Dollar and 1.11 vs. the Euro in six months.
Source Pound sterling live