Current Currency Climate

As Theresa May’s leadership is being called into question once more, the news circulating around positive cross party talks is proving positive for sterling.

At the close of business yesterday GBP was the highest performing currency. GBP/EUR was seen half a percent higher at 1.1612 while the GBP/USD exchange rate was seen 0.82% higher at 1.3037.

GBP gained support during Tuesday following speculation that the talks between the government and the labour party were making progress. There was however no substantive developments with reports that the talks needed to conclude by the middle of next week. The government will be under increasing pressure to take action to avoid holding European elections later this month. However the talks do appear to have life in them, and GBP likes this.

The advance in the Pound comes as markets have appeared to set aside news Prime Minister Theresa May is to appear before an Emergency General Meeting (EGM) of all 800 Conservative constituency chairs and senior activists in June, who will decide whether to demand her resignation for failing to deliver Brexit.

On Monday Night Theresa May was informed that a total of 70 constituency Chairmen have signed a petition to enforce an EGM to vote on her leadership and therefore crossing the required 10% threshold.

The news confirms to us the prospect of a change in Prime Minister over the summer period is likely and therefore expect further politically-induced volatility in the GBP.

May 2019 Considerations

Two political triggers to watch which could hasten a leadership change over the summer period are the local government elections scheduled for Thursday, May 2 and the European elections on May 26.

A defeat in both and we should see the Conservatives heap more pressure on May for her resignation.

If May steps down, the UK will enter into a prolonged period of potential uncertainty, perhaps another deadline extension and therefore increased volatility in GBP.

Attention now turns to the BoE super Thursday.

The Bank of England will announce its interest rate decision in Thursday, the market is searching for indicators that BoE will raise interest rates to counter inflationary pressure, however few expect an increase before Brexit is made clear.

Teresa May travels to Brussels today to try and secure last-minute changes to the backstop agreement after Attorney General Cox failed to make a breakthrough last week, ahead of this weeks planned vote on the Withdrawal Agreement.

• Prime Minister May is expected to hold another ‘meaningful vote’ by Tuesday, followed by two more votes on ‘no deal’ and an extension if her Brexit deal fails to pass
• An extension of Article 50 currently appears to be the most likely outcome of the series of Brexit votes and appears to have been already priced into the market.
• Should there been an un expected result we should see significant GBP movement.

GBP/USD:

The Cable exchange rate opened the week trading @1.30, following a sharp decline Friday afternoon, which saw the pair lose around a cent of its value. At the time writing GBP/USD has improved to over 1.31, as rumours have circulated today the EU could be about to offer the UK a last-minute deal at a possible meeting between Theresa May and Jean-Claude Juncker. The next key event will be the result of tomorrows Vote on Theresa May’s Latest withdrawal agreement, whilst this is most likely to be defeated the margin of defeat could prove key to the GBP/USD rate initially.

GBP/EUR

Like Cable, GBP has performed very well against the single Currency throughout Monday. Having opened trading @1.1563 it has appreciated to @1.1661 at the time of writing, an increase of close to 1%. Coupled with Brexit rumours as mentioned above, and some negative economic data being released by Germany and Spain, the pound has had a great day against the Euro. However, we do expect these gains to be short lived and lost tomorrow evening, as all eyes turn to the result of the Withdrawal agreement Vote in the House of Commons and more specifically the margin of the expected defeat for Theresa May’s Government.