After weeks of turmoil, a semblance of stability is returning to U.K. politics, and the pound is feeling the benefit.
Sterling is headed for its longest winning streak in two months before Theresa May takes over as prime minister later Wednesday, ending a period of instability that has lasted since the U.K. voted to leave the European Union.
Since the June 23 vote, which pushed the currency to its worst day on record, the pound tumbled to the lowest level since 1985 last week, before recovering some of that ground as it became clear a new leader would take power earlier than previously thought. It’s still 11 percent lower since the nation opted for Brexit.
May’s succession is seen as positive for the pound due to speculation she may take a less hardline, and slower, approach to the exit negotiations than her rivals. May, who backed the “Remain” side in the referendum, said Monday she favored waiting until 2017 to trigger Article 50 of the Lisbon Treaty, which starts the potentially two-year process for withdrawing. The outgoing Home Secretary has also indicated that the formation of a new Brexit department with a secretary of state at its helm will be one of her first announcements.
“It’s widely recognized that it will take a very long time to see what Brexit looks like,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. There’s also “some sense that a calm head is in charge in the U.K. rather than a firebrand Leaver.”
Longest Rally
The pound climbed as much as 0.7 percent to $1.3338, the highest level since July 4, and was up 0.1 percent at $1.3266 at 12:47 p.m. London time. The currency is set for a fourth day of gains, the longest rally since May 19.
“It’s very much a case of political and financial stability returning to the U.K.,” said Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd. This is allowing investors to take the opportunity to “reduce short positions and reduce hedging,” he said.
A potential stumbling block for the pound’s recovery is Thursday’s Bank of England policy announcement, its first since the vote. Futures pricing shows the chance of a rate cut has climbed to 83 percent, from 11 percent on the day of the referendum.
BOE Governor Mark Carney signaled this week he’s comfortable with the pound’s decline, telling lawmakers the slide may aid an economy grappling with the impact of the decision to quit the EU.
Three-month implied volatility for the pound versus the dollar, a measure of anticipated price swings based on options, was at 12.5 percent, compared with 16.3 percent on June 27, the first working day after the referendum result was announced, and a seven-year high of 18.6 percent about a week before the vote, closing-price data compiled by Bloomberg show.
To contact the reporters on this story: Marianna Aragao in London at mduartedeara@bloomberg.net, Chikako Mogi in Tokyo at cmogi@bloomberg.net. To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net, Paul Armstrong, Keith Jenkins
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