Pound's Slide May Extend Below $1.40 as Focus Turns to Politics

May Grapples With Tory Rebels as Brexit Troubles Mount

The pound could surrender some of its recent gains to fall back below $1.40 as U.K. political drama collides with a market that’s positioned for further sterling strength, according to Mizuho Bank Ltd.’s Neil Jones.

The U.K. currency declined against all of its Group-of-10 peers Monday after weekend news reports of a possible rebellion among Conservative lawmakers divided over how to leave the European Union. That added to uncertainty over Prime Minister Theresa May’s future as leader of the party. 

“If May is under threat right now it’s a double whammy for the pound,” said Jones, the head of currency sales at the Japanese bank. “General political uncertainty rarely benefits a currency. Also May is deemed as a soft Brexiter while her replacement may be more hard-line.”

Pound positioning has turned progressively more bullish over the past few months, with the latest data from the Commodity Futures Trading Commission showing leveraged funds are now the most optimistic on the currency since August 2014.

The pound dropped 0.7 percent to $1.4066 as of 12:11 p.m. in London. It climbed 2.2 percent last week and touched $1.4345 on Jan. 25, the highest since the day the Brexit referendum result became known. Sterling weakened for a third day versus the euro, slipping 0.4 percent to 88.13 pence.

That the U.K. currency is still holding above $1.40 suggests the market is not yet taking the threat of a leadership election seriously, said Jones. If news reports continue to suggest May’s leadership is at risk, the currency will slide further, he said.

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