UK political risk dominates the agenda
Today's news headlines:
- 'Pound at four-month lows as political clouds gather'. Cable traded down to four-month lows briefly during Tuesday's session, and although anticipation of Theresa May's plans saw the pair jump sharply, with little confidence that the deal can be passed, the Pound is once again under pressure. (Reuters)
- 'Sterling sinks ahead of European Parliament elections'. Concern that big wins for Nigel Farage's Brexit party could see the UK taking a harder line over its departure from the European Union has left the Pound as one of the world's worst-performing currencies against the US Dollar this month. (Financial Times)
Theresa May’s last stand?
Yesterday, the Prime Minister laid out her plans for the fourth attempt at passing her Brexit deal. The anticipation of the announcement was sufficient to drive significant support for the Pound, but this was short-lived after many politicians were quick to deride the compromise. With a second referendum on offer, there's not much more that can be presented by way of a trade-off. The pressure is building on Mrs May to abandon the parliamentary vote early next month and simply resign, allowing her successor to resolve the impasse. With the European elections looming and the prospect of any replacement leader being pro-Brexit, the risk remains on the downside for Sterling.
In the coming days, voters across the European Union will be electing their new Members of the European Parliament. The performance of populist parties will be in focus because they could swing the balance of power on budgetary red lines. Equally, the response from UK voters will be under scrutiny, with heavy losses for traditional parties likely to reinforce the message that the electorate is unimpressed with the current political landscape. Gains for Brexit proponents might result in a harder departure from the EU. Even at these depressed levels, the political risk still poses a threat to the Pound.
Yesterday, the Pound traded at lows not seen since January against the US Dollar. Despite a brief break higher ahead of Theresa May’s 3pm announcement, the subsequent backlash has placed us right where we started, at the bottom of the trading range.
Trading broadly sideways for the past several days, the upcoming elections have the potential to really move markets.
The Pound posted a twelfth successive day of declines on Tuesday, pushing down to lows not seen since mid-February as a result. Optimism that Theresa May was going to serve up a transformational deal to get the Brexit bill passed did provide some support, but this proved to be short-lived. The protracted sell-off is the longest ever recorded in the 20-year history of the common currency.