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Abu Dhabi, UAEWednesday 19 December 2018

Rocky road goes on for UK pound

Concern over prime minister's grip on power clouds market outlook

Sterling had its worst week in some time last week. Daniel Sorjabi/AFP
Sterling had its worst week in some time last week. Daniel Sorjabi/AFP

There may be no respite for the pound after its worst weekly performance in a year.

Sterling fell almost 3 per cent last week, after a chaotic Conservative party conference cast the premiership of Theresa May in doubt. With political intrigue set to continue, the Brexit talks restarting and manufacturing data due, strategists anticipate another volatile week and investors in the options market have turned bearish. Meanwhile, Mrs May could be planning an overhaul of her team of top ministers soon, The Sunday Times reported.

“Theresa May’s position as prime minister is clearly foremost in the market’s mind,” said Jane Foley, Rabobank’s head of currency strategy. “If she goes, investors are going to be fearful that’s going to open up a catalogue of events which will lead to a Labour government.”

On Friday, Mrs May told reporters that she had the “full support” of her cabinet. Although the ex-Tory party chairman Grant Shapps said 30 members of the party were willing to sign a letter calling for her to resign, this falls short of the 48 signatures needed to launch a leadership challenge.

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Mrs May will reshuffle her cabinet after an October 19-20 summit in Brussels, The Sunday Times reported, citing unidentified party sources.

Sterling will “recover its latest Tory-related losses should Mrs May cling on and domestic political risks meaningfully ease,” said Viraj Patel, a currency strategist at ING.

With Brexit talks due to start again this week, one-week volatility on the pound is higher than one- and three-month gauges. That suggests investors see more dramatic moves for sterling in the near term. Meanwhile, one-week risk reversals have turned bearish on the currency.

The market will also be awaiting any further clarity on the Bank of England’s thinking, having priced in an interest-rate hike in November. This week’s data will provide investors with the latest evidence of both how likely the bank is to tighten policy and whether it would be right to do so, said Mr Foley, with industrial production and house prices key.

“We’ve had a number of warnings in the past that a rate hike was very possible only to see no action,” said Standard Bank’s head of currency strategy Steven Barrow. “Another episode of this in coming months might not just set the pound back but could also limit the extent that sterling can rise whenever the bank makes similar warnings in the future.”