Pound Slides as Pressure on May's Leadership Rises: Inside G-10

Updated on
  • Political backdrop set to dominate in coming months: Macquarie
  • Sterling volatility climbs to highest level in two weeks

The pound dropped the most in a week as U.K. Prime Minister Theresa May faced fresh challenges to her leadership and the European Union cast doubt on the prospect of a December Brexit deal.

Leveraged accounts sold the currency after the Sunday Times said 40 Conservative members of Parliament, nearly enough to trigger a leadership challenge, have agreed to sign a letter of no confidence. Sterling fell against all of its Group-of-10 peers after European Union chief negotiator Michel Barnier on Friday raised the prospect of Brexit talks failing to reach a breakthrough by year-end, saying the U.K. has two weeks to come up with a better offer.

“None of this can do the pound any good,” said Gareth Berry, a foreign-exchange and rates strategist at Macquarie Bank Ltd. in Singapore. “The Bank of England has already delivered the ‘one-and-done’ hike. So with no good monetary policy news left to look forward to, the political backdrop is likely to dominate in the months ahead.”

A measure of the pound’s implied volatility rose to the highest in almost two weeks as traders braced for a string of Bank of England speeches and data that includes inflation, the labor market and retail sales. Foreign Secretary Boris Johnson and Environment Secretary Michael Grove have sent a letter to May designed to push her to a hard Brexit, the Guardian reported.

  • GBP/USD slides 0.7% to 1.3103 after declining as much as 0.8%
    • Macro sentiment is also bearish, but most aren’t chasing spot lower and prefer to leave offers at 1.3180-1.3200, Asia-based FX trader says
    • Labour Party says May should work with the opposition to pave way for a Brexit transition given lack of support within her own party
    • “Brexit risks and the stability of the government have pushed to the top of the list of priorities as far the FX outlook is concerned,” Macquarie’s Berry says
    • 1-month implied volatility for GBP/USD rose as much as 0.58 to 7.69, highest since Nov. 2
  • BBDXY rises 0.1%, Treasury 10-year yield falls 2bps to 2.38%
  • Fed Bank of Philadelphia President Harker says he’s looking for another rate increase this year and the balance-sheet unwind will be “boring”
    • “With a labor market this tight, inflation is likely to reassert itself at some point,” he says in text of speech in Tokyo
  • AUD/USD little changed at 0.7663; pair earlier slipped 0.3% after RBA Deputy Governor Debelle plays down expectations for a rate increase without a stronger economy
  • NZD/USD falls 0.1% to 0.6933 as short-term accounts were said to short the pair on reports of division within the Labour coalition over a revised Trans-Pacific Partnership 
  • Some information comes from traders familiar with the transactions who asked not to be identified because they aren’t authorized to speak publicly

— With assistance by Hooyeon Kim, and Michael G Wilson

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