UK: Scope for sustained GBP rally limited as uncertainty remains elevated – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the pound has staged a modest relief rally following the announcement yesterday that Theresa May will become Britain’s new Prime Minister on Wednesday.

Key Quotes

“It followed the decision by Andrea Leadsom to withdraw from the Conservative Party leadership contest, who stated that “a nine-week leadership contest at such a critical point for our country is highly undesirable”. UK assets have reacted favourably to the reduction in political uncertainty which has resulted from the shorter than expected leadership vacuum. Still, the scope for a sustained pound rally is limited given that overall uncertainty in the UK remains elevated following the Brexit vote.

Theresa May has emphasized in her campaign to be the new Conservative Leader that there will be no turning back for the UK stating clearly that “Brexit means Brexit. The campaign was fought, the vote was haled, turnout was high, and the public gave their verdict. There must be no attempts to remain inside the EU, no attempts to re-join it through the back door, and no second referendum”. She will now seek to negotiate the best deal possible for the UK outside of the EU. It still remains unclear what form of relationship she will seek at this stage.

However, she has a clear history at least in terms of rhetoric of holding a tough line over wanting to reduce immigration to more manageable levels. She believes as well that the Brexit vote provided a very clear message from the public that “we couldn’t allow the freedom of movement to continue as it has done hitherto”. The comments point towards potentially difficult negotiations with the EU and more limited access to the single market for the UK.

Theresa May has signalled that she does not plan to invoke Article 50 until the British negotiating strategy is agreed and clear which means it is unlikely before the end of this year. Chris Grayling who has been Theresa May’s campaign manager has stated that he expects the UK to be out of the EU before the next scheduled general election in 2020.  He favours a free trade agreement with the EU which allows for the control of the flow of people coming into the UK. However, one can’t rule out an early general election taking place given that Theresa May is an unelected leader who is now responsible for negotiating Brexit terms which she herself campaigned against.”