Sterling Trounced By Growing Political Challenges

 

The US dollar has begun the new week on firm footing, without the help of either higher interest rates or increased confidence that Congress will agree on a tax plan. Indeed, over the weekend the Chair of the House Ways and Means Committee was explicit that the Senate plan to repeal the federal tax break for state and local taxes will not find support in the House of Representative.  

The US 10-year yield is pulling back from the 2.40% cap it approached at the end of last week, and this is allowing the yen to buck the general strength of the greenback today. Important support is seen around JPY113.00. Japanese equities extended its pullback for the fourth consecutive session today. The Nikkei lost 1.3%, the most since May. The Nikkei has rallied nine consecutive weeks through last week. Cyclically adjusted price/earnings ratio (CAPE), put Japanese shares at about 42% of there average since 1983. In comparison, US shares are 2/3 above their average valuation.Such considerations appear to have helped draw foreign investors back into Japan over the past couple of months.  

The main developments today though is sterling. It had gained 0.9% last week amid broad dollar weakness, but today it is giving it all back. Sterling tested last week’s lows near $1.3060. The main weight is political rather than economic. Prime Minister May is besieged from at least three forces that seem almost impossible to reconcile.  

First, according to a UK paper, there are 40 Tory MPs that would sign a letter of no confidence in May. Under party rules, 48 signatures are needed to trigger a formal leadership challenge. This weakens her hand in Brexit negotiations and opens her up to criticism from Labour, which also supports Brexit, but holds out the promise of a softer Brexit (whatever that means).  

Second, a UK paper reports that the hardline Brexit ministers, Johnson and Gove wrote a “secret” letter to May. Reportedly they outlined their plan for an exit without a deal with the EU and was critical of some in the government who want a less confrontational approach (Chancellor of the Exchequer Hammond). While the substance of leaks is interesting to be sure, they should always be embraced with a question of whose interest is it to “leak. “It seems May would have not interested in revealing the letter’s content. Johnson and/or Gove would seem to have the more to gain, at least in the short-term, in their battle for Brexit, but it would seem to further taint their candidacy to replace May.  

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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