Theresa May set to be named Britain’s new Prime Minister

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12 July 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling and UK stocks both rose sharply on Monday after Andrea Leadsom announced she would be standing down from the Tory leadership contest, paving for the way for long standing Home Secretary Theresa May to become Britain’s next Prime Minister.

S
peaking outside Downing Street, David Cameron announced he would now be stepping down after Prime Minister’s questions on Wednesday, opening the door for Theresa May to become the new PM tomorrow afternoon, much sooner than anticipated.

This led to a sigh of relief among investors, worried about the possibility of a drawn out leadership contest and the prospect of an immediate triggering in article 50, which would kick-start the two year process of Britain’s exit from the EU. Unlike Leadsom, Theresa May has effectively ruled out this taking place before the end of the year.

Earlier on Monday, May also ruled out the possibility of another referendum and claimed there would be no attempt to re-join the EU by the back door. However, uncertainty regarding the negotiation process of Britain’s EU exit remains, particularly given May favoured a vote to ‘remain’ at last month’s referendum.

Away from the UK, the Japanese Yen was just about the worst performing currency on Monday after the country’s Prime Minister Shinzo Abe secured a majority at Sunday’s upper house elections. Abe is set to continue his Abenomics policy, calling for a fresh round of large scale fiscal stimulus measures in a bid to revive the stagnant Japanese economy.

This provided good support for the US Dollar yesterday, which also continued to receive headwinds from last week’s impressive labour report. Financial markets have now brought forward their expectations for the next interest rate hike by the Federal Reserve, placing around a one in four chance of a hike by the end of the year.

Major currencies in detail:

GBP

The Pound rallied by 0.5% against the US Dollar yesterday and a further 1% overnight following the announcement that Theresa May would be becoming Britain’s new Prime Minister. UK stocks also rallied sharply on the back of the news, with the FTSE closing at an eleven month high.

Despite this, investors remain concerned about this Thursday’s Bank of England monetary policy meeting. Following last month’s Brexit vote, market implied probability of an interest rate cut in the UK at this week’s meeting has risen sharply, from effectively no chance to around 75%. Economists appear split down the middle, however, we favour a 25 basis points cut.

The Bank of England MPC meeting on Thursday will be the key event in the currency markets this week.

EUR

With a lack of any major announcements in the Eurozone on Monday the Euro traded within a tight band, although rallied by 0.5% this morning.

Industrial production in Italy fell more than expected, although not by enough to have an impact on the Euro. In the absence of any major economic data, investors will instead focus on next week’s European Central Bank meeting.

The state of the Italian banking system also remains a cause for concern. Eurogroup head Jeroen Dijsselbloem allayed fears, claiming that there was still time to resolve the crisis.

German inflation figures are expected to remain unrevised this morning. The events to watch for in the Eurozone this week are tomorrow morning’s industrial production data and this Friday’s Eurozone wide inflation figures.

USD

The US Dollar index fell rather sharply by 0.4% overnight, fuelled largely by a depreciation against both the Euro and the Pound.

Kansas City Fed President and voting member on the FOMC Esther George spoke in Missouri yesterday, further fuelling the argument that rates in the US could rise before the year is out. George claimed that last week’s labour report, which saw job creation rise sharply to 287,000, was welcome news and should allow the Fed to hike gradually, following the US economy’s sluggish start to the year.

Fed members Tarullo and Bullard will both be speaking this in the US this afternoon. However, with focus firmly on political and monetary policy developments in the UK, announcements in the US economy will likely take a back seat this week.

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