Politics is back at the forefront in GBP market - Rabobank

"UK PM May’s speech at the Tory party conference was intended as a rallying cry to heal the divisions within the party and the cabinet," notes Jane Foley, Senior FX Strategist at Rabobank.

Key quotes:

"Instead it provided a catalogue of embarrassing incidents that rhymed with Tory party’s current disjointed image. GBP slipped only modestly against the EUR while May was on the podium. However, in the hours after the May speech, sentiment against the PM continued to sour. As political uncertainty grew, so did the pressure on the pound. According to the bookies, Labour leader Jeremy Corbyn is joint favourite with Foreign Secretary Boris Johnson as the most likely next Prime Minister for the UK."

"The implication is that investors have to prepare not only for Brexit but also for a possible lurch to the left. When political uncertainty is layered on top of fear that the UK economy is slowing, downside risks for the pound grow stronger almost irrespective of the BoE’s threat to hike interest rates as soon as next month. We maintain a forecast of EUR/GBP 0.95 on a 12 mth view."

"The fact that the bookie’s odds on the length of May’s premiership did not change too much immediately after May’s wretched performance at the party conference this week perhaps reflected that her ability to hold on to office has been in doubt since the June general election. In the last couple of days, however, May’s position has weakened further. Yesterday it was reported that around 30 rebel Tory MPs were planning to confront May as soon as this weekend urging her to resign."

"Although no cabinet ministers are thought to have turned against the PM, Grant Shapps, who has served as a Conservative Party chairman, has indicated that he had a list of colleagues who are calling for May’s resignation. Since the Tory government lost its majority in the June election, there has been fear within the government and the markets that May’s resignation could set in motion a chain of events that could lead to a fresh election. Opinion polls currently indicate that this would likely result in a left wing government led by Corbyn."

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