13/06/2017 - Sterling Suffers From Political Uncertainty

GBP

Infighting within the Conservative Party dominated the headlines yesterday as Theresa May prepared for a showdown which could hasten the end of her premiership.

Two potential leadership rivals, Foreign Secretary Boris Johnson and Brexit Secretary David Davis, pledged their loyalty to May, saying it’s the wrong time for a change at the helm or another general election. Yet the mood in Westminster remained that she’s on borrowed time with the question only when rather than if she will be deposed.

The pound slid to its lowest for nearly two months on Friday and continued to move lower yesterday after shock election results left Prime Minister Theresa May short of a parliamentary majority - facing calls to step down. May reappointed most of her ministers on Sunday but brought a Brexit campaigner and party rival into government to try to unite her Conservatives. She is in talks with Northern Irish unionists to allow her to stay in power.

While the motivations behind the pound's performance since Friday have been muddy, most analysts now say the pound is benefiting from the assumption that Thursday's rebuke for May will soften Britain's approach to Brexit talks.

A number of leading Conservatives on Monday stressed that membership of the European Union's single market - in exchange for freedom of movement for European workers - was not on the table. Traders assume the political conspiracies of the coming weeks and months may spur change on that front.

USD

The dollar dipped on Monday on the run-in to Wednesday's decision on U.S. interest rates, while Britain’s pound was back under pressure after a 2-cent fall following elections which threw Europe’s second-largest economy into political chaos. With a fourth rise in U.S. rates in 18 months now fully priced-in for Wednesday, there is a chance of a weaker greenback after the meeting.

Key Announcements 

09.30 – GBP – CPI YoY; Forecast at 2.7% against a previous of 2.7%

13.30 – USD – PPI MoM; Forecast at 0% against a previous of 0.5%