GBP: Cabinet calamity? – Rabobank

GBP is the only G10 currency to underperform the USD on a 1 day view on the back of another wave of political strife for PM May, according to analysts at Rabobank.

Key Quotes

“The latest bout of chaos in her cabinet stems from the behaviour of International Development Secretary Patel and specifically her scheduling of unauthorised meetings with senior Israeli politicians.  There is a risk that she may be sacked as early as this morning just days after the resignation of disgraced defence minister Fallon.  This comes as a Cabinet Office inquiry is continuing into the behaviour of May’s ally Green.  It has also emerged that a former aide to Fallon was being investigated by police and follows the publication of an opinion poll that shows that public confidence in the Brexit negotiations and Mrs May’s ability to strike a deal has fallen to a fresh low.  The news brings back to the fore concerns over the effectiveness of May’s leadership and whether it can sustain long enough to bring the Brexit negotiations to a conclusion.”

“The last significant flurry of concerns over the ability of the PM to hold onto her job came in early October after the Tory Party Conference and May’s disastrously delivered speech which for many was a strong metaphor for her loss of authority.   The immediate threat to May’s job passed mainly due to fear.  The Conservative Party has not been able to produce an agreed successor with Tory ‘Remainers’ fearful of a ‘hard Brexiter’ and all in the party reluctant to set in motion a series of events which have the potential to end with a general election.”

“Polls continue to suggest that the Labour Party would have a strong chance of victory if another election is called.  That said, the Telegraph is this morning reporting that there could be 40 Tory MPs willing to call on May to set a date for her departure.  May’s already weakened position means the potential of another cabinet member will be a heavy blow.  Going forward GBP will be vulnerable to any signs that the number of Tory rebels pressing for May’s departure is on the rise.  Aside from the risks that the odds of another general election could be increase, more trouble and strife for May has negative implications for the progress of Brexit talks.”

“The latest round of Brexit talks are due to commence in Brussels tomorrow. For the market the most important aspect of these talks is whether they increase the prospect of trade talks commencing in December.  For this to happen there will have to be more movement on the three legacy issues related to the N. Ireland border, the divorce settlement and the rights of EU citizens.  Yesterday, a UK paper aimed to provide reassurance that the process of registering existing 3.2 mln EU citizens in the UK will not be obstructive, though EU citizens will face tougher deportation rules.”

“Although GBP is trading on a softer note this morning on the back of political concerns, its losses remain constrained relative to the moves registered in early October after the Tory Party Conference. If pressure on the PM to step aside builds again into the coming weekend GBP can be expected to remain under pressure.  That said, the fact that Labour’s Corbyn waiting in the wings ironically strengthens May’s hand and potentially limits the risk that she will be forced to stand aside.”

“It is our view that GBP remains vulnerable to political uncertainly going forward most specifically regarding Brexit. Although we are optimistic that an EU/UK trade pace will eventually be agreed, all Brexit proceedings to date suggest that this could be a last minute compromise.  In the meantime uncertainty is likely to weigh on UK investment and growth potential.  The implication is that GBP has the potential to slip further on a 12 mth view before snapping back around March 2019.  We retain a 12 mth forecast of EUR/USD0.95.”