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British Pound: Pressure Grows on May to Go, Sterling Volatility vs. Euro and Dollar Forecast to Increase

Pressure on PM May to resign grows

Image © Number 10 Downing Street

Pound Sterling is seen trading mixed as traders return to their desks after a long Easter weekend, with the currency being tipped to take cues from political headlines over coming days and currency specialists telling us to expect a pick-up in volatility.

For now though, political tension is yet to break through to the currency markets and Sterling is subject to moves in the bigger Dollar and Euro.

The Pound-to-Dollar exchange rate is quoted a quarter of a percent lower on a day-on-day basis at 1.2947 with the slide sub-1.30 apparently being driven by a broad-based strength in the U.S. Dollar.

Indeed, Dollar strength appears to be the story of the day with the currency recording a quarter-of-a-percent advance on the Euro.

The weaker Euro has in turn allowed Sterling to advance and we are quoting the Pound-to-Euro exchange rate at 1.1555 at the time of writing, up a quarter-of -a-percent.

Sterling is therefore a passenger at present, but we get the sense that currency traders are increasingly nervous as domestic politics are once again screening as a major concern.

We look for news on the political front to ultimately trigger more substantial moves in the UK currency.

"Political headlines are the main risk for GBP," says Robin Wilkin, a strategist with Lloyds Bank. "Media reports suggest that UK PM May is facing renewed pressure to step down, this time from grassroots level."

Over the long weekend reports have emerged that the Conservative Party membership is so disheartened by the slide in the party's standing in the polls they are willing to alter long-standing rules to allow Prime Minister Theresa May to be deposed.

According to reports, more than 70 local association chiefs - angry at her handling of Brexit - have called for an extraordinary general meeting to discuss her leadership.

A non-binding vote will be held at that National Conservative Convention EGM.

Further reports suggest Sir Geoffrey Clifton-Brown, the treasurer of the 1922 Committee of backbench Conservative parliamentarians, said he expected the group’s executive to vote today on whether to bring forward the date on which a challenge to May’s leadership can be mounted.

On December 12 May won a no-confidence vote in her leadership of the Conservative Party by 200 to 117, and current rules state she is immune to any further challenges for a year.

Therefore, that Conservative Party members are willing to change time-honoured rules casts some light on just how unpopular May is and the pressure she faces to completely abandon her current strategy on Brexit.

"As the UK parliament regroups after its Easter recess, the reprieve from Brexit related rhetoric can be expected to come to an end," says Jane Foley, Senior FX Strategist with Rabobank in London.

But, why does the the premiership of Theresa May matter for the Pound, and importantly what are the implications for the currency's outlook?

May has to date adopted a consensus-building approach to delivering Brexit, one that sought to unite her party behind the withdrawal deal she struck with the EU in late 2018.

Markets liked this approach as any consensus agreement would ultimately lead to a 'softer' version of Brexit.

Her party's inability to unite around her deal saw her opt to delay Brexit rather than exit without a deal.

For Sterling bulls hoping for a stronger currency, this approach is preferred as exiting without a deal is widely-held to be the worst-case scenario for the currency which is widely expected to fall sharply in such an outcome.

However, the Conservative Party has seen support plummet with some polls putting support down over 10 points to 23% following the decision by May to delay Brexit until October 31.

The emergence of Nigel Farage's Brexit Party appears to have sucked support away from the Conservatives, leaving them exposed to a massive failure at impending European and council elections.

Even if May were to survive until October we believe she would be under immense pressure to deliver Brexit at all costs, and therefore expectations for a 'no deal' should be notably higher than at present we believe.

Furthermore, if May is deposed then it is highly likely the Conservative membership would opt for a Brexiteer, someone who will seek to renegotiate the current Brexit deal with the EU.

Should the EU refuse to renegotiate, as they almost certainly will, then we believe the new leader would likely opt for a 'no deal' Brexit.

Domestic politics therefore are increasingly pointed to a 'no deal' Brexit we believe, and this bodes negative for Sterling's outlook.

Should the market adopt the same view, we believe Sterling will fall as markets incorporate a greater risk premium into the currency.

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Cross-Party Breakthrough Offers Upside Risks to Sterling

Meanwhile, Parliament reconvenes today as cross party talks between the Conservatives and Labour are ongoing.

"PM May will again ramp up Brexit negotiations this week as the House of Commons sits again and pound volatility is set to increase," says Lee Hardman, a foreign exchange strategist with MUFG in London.

Should a deal be struck between the two parties we believe Conservative and Labour moderates could potentially pass the Brexit deal, which would be a positive for Sterling as it almost entirely negates the prospect of a 'no deal' Brexit and opens the door to economic certainty.

David Lidington, the Prime Minister's deputy, says Labour and the Conservatives are testing out each other’s ideas as they try and resolve the deadlock.

It is believed both sides will "take stock" over coming days.

But, there are numerous reports that suggest that progress is unlikely with the incentive for Labour to help the Government in this time of need being in short supply.

The prospect of talks failing are therefore high, further closing options available to an under-pressure Prime Minister.

"There seems to be little impetus for Labour to rush to the support of the ailing government. In this case it becomes increasingly likely that initiative on Brexit will shift again to the House of Commons in a series of alternative votes, and that the probability of a Tory leadership election or even a general election will rise," says MUFG's Hardman.

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