Much of the pound’s value going into this week hinges on whether or not the PM survives the next few days. With so many resignations last week and so many new names to add to the list of contenders for her job, the odds certainly do feel stacked against her and indeed the pound.
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Currently, GBP EUR is trading in the mid-1.12s, judging by sterling’s track record since the start of the year, this suggests that the markets believe there is a fair 50/50 split between the PM keeping her job or losing it.
However, I’m sure this will quickly change. Brexiteers Gove, Leadsom, Grayling, Fox and Mordaunt are all due to meet this morning to draw up a rival plan to May’s. Details of this and the support it gathers has the potential to draw further volatility to the pound.
As it stands, I feel there is far more downside risk in the immediate term for those in the market for foreign currency.
Should a vote of no confidence fail to materialise, only marginal gains can be expected. The chances of the PM being able to get her current deal through parliament and/or negotiate a more acceptable deal from the EU this week seem to be dwindling by the day.
If however, Sir Graham Brady (chairman of the backbench 1922 committee) does receive the required 48 letters from MP’s to call the Prime Minister’s position into question, severe losses for sterling should naturally be expected. Former Brexit minister Steve Baker suggested over the weekend that he is confident that over 50 MPs have indeed submitted their letters. Time will tell if this proves to be true.
One reason for optimism is that the EU seem to be openly encouraging further negotiation with PM May who is due to meet with Donald Tusk before the week comes to an end. I expect the markets to acknowledge this, and sterling could stand to benefit.
Equally, the PM is speaking at the CBI conference this morning to address a large number of the UK’s biggest business heads. Since May submitted her plans, uk business as a whole have reacted positively as a result of a show of certainty. It is possible this conference will show support for May and the pound might gain further.
On the other hand, the Bank of England’s outlook on the damage the economy might have incurred from the recent political turmoil will be released midway through the week.
Importantly, economic growth and recent inflation data have both shown a slowdown of late, effectively squashing any hopes for a positive change in monetary policy for the foreseeable future. I expect nothing different from Thursday’s meeting and as such expect that sterling is stuck in its negative trend.
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