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Politics is behind the pressure on the pound - Rabobank

"Once again GBP is carrying the mantle of the worse performing G10 currency on a one day view and once again politics is behind the pressure on the pound," note Rabobank analysts.

Key quotes

In the middle of last week the Telegraph reported that there could be 40 Tory MPs willing to call on May to set a date for her departure. At the time this headline was hidden beneath those concerning the resignation of a second government minister in a week.  The Sunday press, however, highlighted the story along with another concerning a memo to May from ministers Gove and Johnson providing instructions on how she should deliver Brexit.  Both reports highlight the weakness of the PM’s position and raise the question as to whether May will be able to hang onto the premiership long enough to trigger Brexit in March 2019. 

The latest wave of pressure on May follows last week’s acknowledgment from EU Brexit negotiator Barnier that the UK has only two weeks to offer concessions regarding the size of its divorce bill if there is to be any chance of a promise to start trade talks in December. This is because the EU needs time to ensure that agreements are in place before next month’s summit commences.  The pressure on GBP this morning would appear to reflect a rising anticipation in the market that there could be another delay to the start of the trade talks.  In turn, this increases the prospect of there being insufficient time for the bones of a trade pact to be put in place before Brexit occurs. 

Clearly the Brexit negotiations are at a crucial juncture. However without a majority May’s leadership has been weakened and she appears unable to rally her cabinet behind her.  Without a strong leader, investors will fear that the PM will be distracted and that the UK’s negotiating position will be compromised.  However, it remains the case that there is not an obvious successor in the Conservative Party.  Tory ‘Remainers’ are fearful of a ‘hard Brexiter’ at the helm and vice versa, while all in the party are reluctant to set in motion a series of events which have the potential to end with a general election.  The latest YouGov poll for the Times has indicated that the Labour party currently could take 43% of the vote in a general election against 40% for the Conservatives.  Interestingly, however, this poll also suggests that support for PM May actually gained by 1 point over the past month, while support for Labour leader Corbyn edged down by 2 points.  This result will provide some solace to May and could help subdue calls for a leadership challenge. That said, very few expect May to hold her position long enough to fight another election and many doubt if she will in Downing St long enough to see Brexit through.  

A further delay in the start of trade talks beyond next month could result in many firms triggering plans that assume a hard Brexit even if a trade deal is eventually put in place. This could have negative connotations for investment, the labour market and growth.  

At the start of this month the BoE indicated that it was in no rush to follow up its 25 bps rate hike. This clears the decks for politics to be the most significant influence on the pound in the remaining weeks of the year.  Near-term, GBP is clearly vulnerable to political uncertainly and over the medium-term politics is likely to ensure that volatility is heightened.  Although we are optimistic that an EU/UK trade pact will eventually be agreed, all Brexit proceedings to date suggest that this could be a last minute compromise.  In the meantime uncertainty is likely to weigh on UK investment and growth potential.  The implication is that GBP has the potential to slip further on a 12 mth view before snapping back around March 2019.  We retain a 12 mth forecast of EUR/USD0.95.

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