I’m Not Sure Rate Hike Plus Political Crisis Is Best Combination For UK

Obviously, Theresa May is in trouble.

We mentioned this in passing on Sunday evening in our week ahead preview and U.S. investors tend to generally not give a shit about this kind of thing, which is too bad because that kind of attitude leaves people scratching their heads when everything goes to hell in a handbasket seemingly out the clear blue sky.

Long story short, The Sunday Times said 40 Conservative MPs (so eight short of the number needed to require a vote), have decided to sign a letter of no confidence in May. That, in turn, led Labour to lambast May for not having the support of her own party leading to still more questions about her ability to deliver the Brexit transition period she’s promised.

 

“Over recent weeks, it has become increasingly clear that you alone do not have the authority to deliver a transitional deal with Europe and to take the necessary steps to protect jobs and the economy,” Labour’s Keir Starmer, the party’s Brexit spokesman, wrote in the letter to May on the way to proposing some kind of deal.

Rabobank’s Jane Foley (their head of FX strategy) notes that this “coincided with the leak of the letter from Gove and Johnson to May apparently instructing her how to run the talks [with] both suggesting further trouble in the cabinet and since this would have negative implications for Brexit talks, the political outlook currently appears very rocky for the pound again”

And it’s not really “again” – there has not been a time since Brexit when the “political outlook” did not “appear very rocky” for the pound. It’s just that occasionally people forget what Brexit actually is. Then one day, reality comes calling again and we get days like today.

Basically, she’s fucked – caught between a rock and a “hard Brexit.” And that of course translated directly into a tumbling pound:

Pound

And listen, you’d be remiss if you didn’t note that this is all coming less than two weeks after the BoE hiked rates for the first time in a decade. It was a “dovish” hike and that dovishness sent the pound tumbling in its own right, but this certainly seems to set the stage for a rather nasty mix of tightening monetary policy against a backdrop of extreme political turmoil.

So that’s something to keep in mind. Remember, Carney will be speaking this week on a panel with Yellen, Draghi, and Kuroda.

 

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