Short-term prospects for the pound linked to Theresa May’s fate

16 Nov 2018

Lewis Thorn

Dealing team

Toppling of prime minister would threaten immediate pound to euro and pound to dollar rates, but sterling still looks cheap over the longer term.

With everything that’s happened politically this week it’s been difficult to keep track of what’s been going on, mainly due to the pace at which Brexit developments have been occurring. We were having a conversation among ourselves thinking back to the days when GDP or manufacturing data would move the markets, now you could argue one of the largest market movers is Twitter.
 
This recent trend ramped up when Trump took office, when his charged-up posts would send markets spiralling in either direction. Yesterday it was the social media political rumour mill which kept the market buzzing all day long; 10 years ago we just wouldn’t have had the access to this kind of insight.
 
That brings us onto where the pound is currently. At the beginning of the week, the prospect of a deal that had been put together by the UK that the EU could agree to would have had sterling sellers licking their lips at the prospect of a stronger pound. 
 
However, it just wouldn’t be Brexit without a twist in the tale. Despite the Cabinet agreeing to the deal on Wednesday night to Theresa May’s face, Thursday's Cabinet resignations left the prospect of the plan getting through Parliament in tatters. 
 
With that, the pound’s short-term fortunes look pretty bleak indeed, with GBPUSD currently trading slightly higher than the overnight low of 1.2724 and GBPEUR back at 1.1280, off the week’s high of 1.1553. 
 
Sterling’s short-term prospects look closely linked to the future of Theresa May. Last night she appeared on TV stating she was prepared to see Brexit through to the end. Twitter rumours indicate she may not make it to the end of next week.
In currency, short-term support levels on the downside come in at 1.2696 (GBPUSD) and 1.1210 (GBPEUR) - if May were to be toppled these levels would surely be under threat. Last night she likened herself to the cricketer Geoffrey Boycott - his test batting average was 48, ironically the same number of votes the 1922 committee needs to send her wickets crashing.
 
Regardless of the short-term difficulties the pound faces, the view here at Investec is that it looks cheap. While there is almost certainly no chance that the draft agreement, in its current form at least, will make it through Parliament, it looks like a cross-party motion may be required in order to get a deal agreed.
 
The likely outcome of any deal of this nature will be a softer Brexit, which the markets are expected to receive well. We still think the chances of a "hard Brexit" look slim, as that isn’t really in anyone’s interest. Although the deadline is looming ever closer, you only have to look at how quickly the EU and UK have progressed in discussions in the past month or so to get an idea of how keen both sides are to reach an agreement strike a deal. 
 
We still expect that GBPUSD could trade up to 1.40 by the end of next year although advise caution that this is based on a deal being struck. All is not done and we expect businesses will continue to plan for either eventuality.