The British Pound started the week significantly bullish against the Euro and U.S. Dollar. In a week where Bank of England, Mark Carney speaks and the UK is set to release a host of important data on property, mortgages and monetary policy.
With Brexit still not solved, political headlines are the key catalysts in Sterling’s outlook this week with cross-party talks between the Conservatives and Labour at the centre of focus. Unsurprisingly, the Tory government has yet to find a way forward in talks with the opposition Labour Party on finalising a Brexit deal, Prime Minister Theresa May’s spokesman said on Monday – talks would continue later on Monday with a “plenary session” due.
Understandably, a clear breakthrough in talks poses significant upside potential to Sterling as it increases the chances of a Brexit deal and reduces the tension and negative sentiment of a civil political war. The markets, however, are yet to price this in. The Pound-to-Euro exchange rate is currently at 1.1592, the Pound-to-Dollar exchange rate at 1.293. The pound is stronger than the previous week but is well within the confines of recent ranges. Markets are wary of infighting, time wasting, false starts creating uncertainty. Last April was pretty dismissal as a string of poor data releases and negative Brexit talks weighed the pound down
It’s widely acknowledged that expectations for failure are already largely priced in by the market, therefore, the talks at this stage don’t hold too much trading risk but the sizeable upside to the British Pound if pleasantly surprising.
Both Labour and the Conservatives don’t want to shoulder the blame for failed negotiations but also don’t want to protract talks any longer. Sterling is and has been for two years, a politically responsive currency and the political temperature should rise later in the week as local elections are to be held on Thursday. The Conservative Party are expected to lose up to 1000 council seats.
The loss of council seats by the Conservative Party are not typically of interest to currency markets, but they are useful as a political temperature gauge of how the sentiment of the British public feel about the current ruling government, Theresa May’s leadership and the conduct of Brexit negotiations.
“Local elections on Thursday will be the latest barometer of the damage to Conservative support being done by the Brexit shambles. Comparisons with the last elections in the same seats (2015) are complicated by boundary changes, but this was a high watermark for the Tory support compared to their current poll ratings and significant losses are likely,” says Adam Cole, a foreign exchange analyst with RBC Capital Markets.
“The immediate implications for GBP will depend on May’s prospects for surviving as PM, with imminent change (Johnson is runaway favourite to replace her) lifting political uncertainty further,” says Cole.
“Local UK elections are likely to rattle the Pound,” says Robert Howard, a foreign exchange analyst who sits on the currency desk at Thomson Reuters, “the Tory performance on May 2nd is of prime interest.”
The political uncertainty factor, however, extends beyond Thursday’s vote. The European elections are due on May 26th which will make for further potential politically-induced volatility as the ruling Conservatives are likely to suffer an even greater humiliation at this vote.
Current polling shows the Conservative Party will lose heavily to the Brexit Party of Nigel Farage which will likely top the poll ahead of Labour.
A recent poll by popular survey company YouGov puts Farage’s Brexit Party on 28%, up 5%. Labour are unchanged on 22% and the Conservatives are down 4% on 13%.
Conservative MPs and the membership are furious and frustrated the UK will have to take part in EU elections next month, something that May and most of Parliament had previously pledged would never happen.
While the stalling of Brexit was initially viewed as being positive for the British Pound as it removed the “No-Deal” which pacified business, a long, protracted delay isn’t welcomed as everyone is in limbo. “The extension for the Brexit date won earlier by May is not seen in a positive light by the market, because it merely raises the risks but without any commensurate opportunities. Any investor can tell you that is a bad place to be in,” says Elwin de Groot, Head of Macro Strategy with Rabobank in Amsterdam.
A constant, stable and boring range is to be expected rather than any surge or rally to new highs.