Sterling has dropped lower across the board since Monday with the currency set to post its largest weekly decline in a year as we approach the first anniversary of last October’s flash crash. The drop in the pound has boosted the FTSE 100 with the benchmark moving back above 7500 and the market now trades within a percent of its all-time weekly closing high.
Politics and economics pose dual threat
There have been several developments which could be attributed to the declines seen in the pound this week, with both political and economic factors at play. On the political front Theresa May has been back in the headlines for all the wrong reasons whilst some softness seen in recent macro data, in addition to rising doubts as to whether the BoE will back up their hawkish rhetoric with action, weighing on the currency. With a series of blunders undermining her key Tory party speech, which had been hoped by her supporters to unite the party, the spotlight is firmly back on the PM - and not in the way she would have wanted. Cabinet ministers have been rallying around Mrs. May since the event which was blighted by a persistent cough, malfunctioning stage props and a prankster handing her a mock resignation from Foreign Secretary Boris Johnson but murmurings of discontent are growing. Calls this morning from former Conservative Party chairman Grant Shapps for her resignation, amidst claims that the proposal has the backing of 30MPs, reveals just how precarious her position is.
Boris the frontrunner to replace May
With pressure mounting on the PM it is worth noting that in order to trigger a leadership contest, a total of 48 MPs would need to write to the chairman of the 1922 committee of backbench Tories. Should this threshold be met the Boris Johnson will be one of the frontrunners for the role and this could lead to a marked shift in the government’s stance on Brexit negotiations. Boris remains a millstone around the PM’s neck, and despite several recent protestations of his unwavering support he may be simply biding his time before mounting a tilt at party leadership. Mr. Johnson has been openly critical of what he feels has been a clear softening in the negotiating standpoint of the government on Brexit and would clearly prefer a harder approach.
Uncertainty weighing on the pound
In terms of what this means for the markets it is far from certain. On the one hand a harder approach would likely mean more severe disruption in the interim but may ultimately leave the country better equipped and in turn provide an appreciation in the pound. Much of the rise in the pound this year came following a speech by the PM in January during which she outlined a “hard” approach stating that no deal would be better than a bad deal. The pound also gained heading into the summer’s election when a large Tory majority was forecast and seen as strengthening the government’s position to head to Brussels and strike a better deal.
On the other, a softer approach would cause less turbulence in the near term and could be argued to be positive for sterling. After the disastrous election result for the conservatives there has been a clear shift, with leaders now seemingly far more conciliatory in their tone. Given that the pound remains well below pre-Brexit vote levels it is not hard to make a case for the currency to do best if the terms between the UK and EU more closely resemble what was previously in place. What is clear, is that the uncertainty is imparting some downward pressure on sterling and a very real possibility of further political upheaval will unlikely be seen as positive in the near term.