Written by Gary Howes
Leading figures in the Conservative Party have rallied behind UK Prime Minister Theresa May over the weekend and this leads us to suggest Sterling might enjoy a positive start to the coming week.
The British Pound was the worst-performing global currency in the week ending October 6 as markets fretted over the potential for fresh political uncertainty in the UK amidst suggestions May’s tenure at the top would be challenged.
Fears peaked on Friday on an attempted rebellion lead by former Conservative Party chairman Grant Shapps. The Pound-to-Dollar exchange rate fell to a low of 1.3027 while the Pound-to-Euro exchange rate fell to a low of 1.1120.
But Sterling managed to pare gains into the close as the rebellion was ultimately quashed with any potential plotters failing to back Shapps.
Saturday meanwhile sees senior Conservative Party figures publicly back May.
Rising-star and leader of the Scottish Conservative party Ruth Davidson told the prime minister’s critics should “put up, shut up and get off the stage”. This is significant as Davidson is touted as a potential future leader of the party and is well respected owing to her leading the party to its best electoral results in Scotland for a generation.
But more importantly, Foreign Secretary Boris Johnson has since urged colleagues to "get behind" the PM because "people are fed up with this malarkey".
In a WhatsApp message Johnson urged Tories "talk about nothing except policies".
Recall it was Johnson’s issuing of apparently divergent views on Brexit that first prompted a frenzy of speculation amongst the British media that he was likely to challenge May.
There is the real chance Sterling might recover if markets see the challenge to May having been put aside.
"Our short-term financial fair value model estimates show a 1-2% risk premium currently priced into GBP, which suggests that there is a potential for a GBP relief rally if questions over PM May’s leadership credentials abate," says Viraj Patel, an analyst with ING Bank N.V. in London.
ING expect GBP to recover its latest conference-related losses should May cling on and domestic political risks meaningfully ease.
"The narrative will shift back to the Bank of England story, with risks of the UK curve steepening further if Carney & Co support a rate hike with a constructive outlook for the UK economy at the November BoE meeting," says Patel.
So what targets are ING seeing on any potential relief rally?
"Should the Foreign Secretary Boris Johnson leave the Cabinet, markets may see this as drawing a line, albeit temporarily, under the current split within government which many believe is all too apparent. That would be a catalyst for a symbolic relief rally in the pound," says Patel.
The GBP/USD exchange rate is seen rising back to 1.33 and the GBP/EUR exchange rate rising back to 1.1363 (EUR/GBP down to 0.88).