Pound path gets hazier on political tremors

Theresa May’s decision to step down as Britain’s prime minister just made the bruised pound’s outlook even murkier.

The uncertainty around Brexit is now substantially higher given traders have to contend with what the new leader’s stance would mean for the nature of the divorce. The pound has seen a record-long losing streak against the euro this month, weighed down by fears that a pro-Brexit premier, such as current favourite Boris Johnson, could pull Britain out of the European Union without a deal, an outcome long seen as the worst-case outcome for markets.

Still, sterling’s stability after May’s resignation is a sign that a disorderly Brexit isn’t a foregone conclusion, according to Lars Merklin, a strategist at Danske Bank. He expects the UK currency to remain stuck round these levels while markets try to digest the results of the ongoing EU parliamentary elections and decipher the various likely Brexit scenarios.

‘Game of probabilities’

“It’s really a game of probabilities versus where the pound is today,” Merklin said. “Next up is to figure out how moderate Boris Johnson truly will be, if he wins, and if the math to get something done in either direction of Brexit has changed. The time it takes to figure all that out implies sterling will consolidate over the coming month.”

The pound was little changed Friday at 88.35 pence per euro, halting a more than 3.5 per cent slide since May 3. Against the dollar, sterling was at $1.2661 and on track for its third weekly decline. UK gilts were little changed, with the 10-year yield having earlier touched 0.945 per cent, the lowest since mid-2017.