The pound rose on Friday and was set to snap a record losing streak against the euro after British prime minister Theresa May set out a departure date after failing to push through a Brexit divorce deal.
Trading was volatile as concerns rose that she is likely to be succeeded by a eurosceptic leader, potentially increasing the chances of a ‘no-deal’ Brexit.
“Currency markets had been expecting the announcement all week and much of the Sterling selling had already occurred before the announcement,” said Lee Evans, head of FX trading and strategy at Bank of Ireland.
“After low levels of volatility last year, Irish businesses have adjusted to the increased currency movements already this year which should help them prepare for further volatility in the months ahead,” he added.
While there is no clarity on who Ms May's will be, markets are concerned that a tougher stance with the European Union might prompt investors to turn more negative on the outlook for the pound in the coming months.
Those concerns have pulled the rug from under the pound over the last two weeks, prompting traders to sell the currency against the euro and the dollar aggressively and dialling up expectations of Britain crashing out of the EU without a deal.
Investec treasury analyst Gearoid Keegan said that while Sterling’s weakness isn’t expected to continue indefinitely, the distraction that will be caused by a leadership contest increase the chance of a further Brexit delay or a no-deal Brexit.
“Consequently, we believe that we could be in for a sustained period of GBP weakness,” he said.
“We also believe any extension will reduce the prospects of the Bank of England raising rates despite inflation peaking back above its 2 per cent target in April, and record employment levels likely to lead to further inflation,” Mr Keegan added.
Tougher stance
While there is no clarity on who Ms May’s will be, markets are concerned that a tougher stance with the European Union might prompt investors to turn more negative on the outlook for the pound in the coming months.
Those concerns have pulled the rug from under the pound over the last two weeks, prompting traders to sell the currency against the euro and the dollar aggressively and dialling up expectations of Britain crashing out of the EU without a deal.
"None of this should come as a surprise to currency markets, and as such should already be priced in, with the pound already looking a little firmer in early trading," said Michael Hewson, chief markets analyst at CMC Markets based in London.
Against the dollar, the pound was 0.4 per cent higher at $1.2713 after her announcement.
Versus the euro, the pound was a third of a percent stronger at 88.05 pence after 14 consecutive days of losses as traders trimmed back some of their negative bets on the pound before a long weekend.
Pronounced falls
Recent falls in the pound have been pronounced because investors have cut back their positions on the pound to neutral, removing any potential support for the British currency.
Still, derivative markets were broadly quiet with risk reversals on the pound holding near recent lows while one-month volatility indicators remained subdued.
The leading contenders to succeed May all want a tougher divorce deal, although the EU has said it will not renegotiate the withdrawal treaty it sealed in November.
Boris Johnson, the face of the official Brexit campaign in 2016, is the favourite to succeed May. Betting markets put a 40 per cent implied probability on Johnson winning the top job.
Strategists at OANDA, a futures brokerage, say if Boris Johnson becomes the next prime minister, the pound could fall as far as $1.20, a level not seen since the first quarter of 2017. – Reuters
