Pound Reaps Rewards as May’s Succession Calms Political Storm

Has Theresa May Got What It Takes to Steady the Ship?
  • Sterling touches highest since July 4 before reversing course
  • Incoming premier favors waiting until 2017 to trigger EU exit

After weeks of turmoil, a semblance of stability is returning to U.K. politics, and the pound is feeling the benefit.

Sterling touched its highest level in more than a week versus the dollar as Theresa May takes over as prime minister, ending a period of instability that’s lasted since the U.K. voted to leave the European Union. And while the pound fell Wednesday, it has still risen for three of the past four days.

Since the June 23 vote, which pushed the currency to its worst day on record, the pound tumbled to the lowest level since 1985 last week, before recovering some of that ground as it became clear a new leader would take power earlier than previously thought. It’s 11.5 percent lower since the nation opted for Brexit.

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May’s succession is seen as positive for the pound due to speculation she may take a less hardline, and slower, approach to the exit negotiations than her erstwhile rivals. May, who backed the “Remain” side in the referendum, said Monday she favored waiting until 2017 to trigger Article 50 of the Lisbon Treaty, which starts the potentially two-year process for withdrawing. The outgoing Home Secretary has also indicated that the formation of a new Brexit department with a secretary of state at its helm will be one of her first announcements.

“It’s widely recognized that it will take a very long time to see what Brexit looks like,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. There’s also “some sense that a calm head is in charge in the U.K. rather than a firebrand Leaver.”

Longest Rally

The pound climbed as much as 0.7 percent to $1.3338, the highest level since July 4, and was down 0.6 percent at $1.3162 at 2:18 p.m. New York time.

Three-month implied volatility for the pound versus the dollar, a measure of anticipated price swings based on options, was at 12.5 percent, closing-price data compiled by Bloomberg show. That compares with 16.3 percent on June 27, the first working day after the referendum result was announced, and a seven-year high of 18.6 percent about a week before the vote.

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A potential stumbling block for sterling’s recovery is Thursday’s Bank of England policy announcement, its first since the vote. Futures pricing shows the chance of a rate cut has climbed to 82 percent, from 11 percent on the day of the referendum.

“Some of the optimism that was priced in the past couple of days following the quick appointment of the new prime minister in the U.K. is starting to fade,” said Lee Hardman, a London-based strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “The bigger picture is still that there’s huge uncertainty following the Brexit vote.”

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