Pound Gains as U.K. Government Seen Averting Leadership Battle

The pound climbed to the strongest level in almost a month on optimism that a crisis engulfing U.K. Prime Minister Theresa May’s government won’t spiral into a leadership challenge.

Sterling gained against both the dollar and the euro in London trading as traders judged the resignation of Brexit Secretary David Davis would make a soft exit from the European Union more likely, even as Brexiteer Dominic Raab was announced as Davis’ replacement. Brexit-supporting lawmaker Jacob Rees-Mogg said on Monday that a confidence vote in the prime minister wasn’t immediately in the cards.

“The pound is able to live with ministerial resignations as long as that is the extent of the fallout,” said Viraj Patel, an analyst at ING Groep NV. “At this stage, one is inclined to interpret Davis’ resignation as a sign that the U.K. government is steering toward a softer Brexit — which is the more powerful, positive pound driver.”

The U.K. currency may be vulnerable if Davis’ resignation sparks a leadership challenge for May, while the appointment of Raab as Brexit secretary isn’t a major game changer, said Patel. On the other hand, if May manages to stem the rebellion it will be seen as giving the green light for her to pursue a closer relationship with the EU.

For all this weekend’s headlines, the pound is still trading within recent ranges. Markets have cautiously welcomed May’s proposed “soft Brexit” strategy but are waiting to see how the EU responds, said Mitul Kotecha, a senior currency strategist at TD Securities in Singapore. “The path ahead is complicated.”

The pound rose 0.4 percent to $1.3334 as of 10:32 a.m. in London, touching the highest since June 14. It was up 0.2 percent to 88.29 pence per euro. The next few days could be quite noisy in terms of the politics, so investors will be waiting on the sidelines for the right opportunity, Patel said.

Here’s what other analysts are saying on Monday’s market moves:

Nomura International Plc

• The pound is rallying “as the broader message is a softer Brexit,” wrote strategist Jordan Rochester in emailed comments
• May has only faced one cabinet resignation so far, which suggests a lack of support for a leadership challenge, he said
• Appointment of Brexiteer Dominic Raab doesn’t change things as “number 10 is still in charge”
• If a leadership challenge is called, it’s a “different ball game”

TD Securities

• Davis had been sidelined from negotiations for the last six months, so his departure won’t impact the strategy and removes a vocal critic of May’s approach, writes European head of currency strategy Ned Rumpeltin
• If May does survive a leadership challenge, “she will emerge in a stronger position, ultimately, which could also be reflected in forex markets”

RBC Europe Ltd

• We have predicted the pound will be at $1.27 at the end of this quarter, but “the range of possible outcomes around that is very wide,” said chief currency strategist Adam Cole
• If Davis resigning “is the full extent of the collateral damage, things could have been much worse, Johnson or Gove would have been far more dangerous outside the cabinet”
• We still need to see how Brussels responds, “some reservations are probably inevitable and part of the negotiating process”

Societe Generale SA

• Many people were expecting the pound to fall, writes strategist Kenneth Broux
• The pound could weaken from here “if we have a government crisis on our hands”
• Would be advising clients to sell the pound rally if we do get a leadership challenge
  • GBP/USD at $1.3472 is the top of the range but we could test $1.3361 (50-DMA) tomorrow if monthly GDP comes in strong
• Market optimism could be overblown in sense that “Raab does not by default lead to a softer Brexit per se, something markets may have hoped for”

Credit Agricole SA

• The market is focusing on a “softer Brexit proposal,” writes currency strategist Manuel Oliveri
• GBP should keep selling interest low because “the Bank of England is widely expected to consider additional policy action in August and politics won’t derail such prospects”
• What we have seen so far suggests “there is a low risk of May facing any turmoil anytime soon”

— With assistance by John Ainger, and Gregor Stuart Hunter

(Updates with Raab appointment, analyst comments from 2nd paragraph.)