With the Bank of England rate hike in the rearview mirror, the British pound is in search of a new narrative to drive future trading. In an earlier commentary, we wrote that economic data and central bank policy are now in the backseat as the Brexit deadline approaches. Looking at speculator sentiment, traders are no longer at extremes in the currency, meaning that the pound can go either way. This leaves politics, both domestic and international, as the key driver behind the currency. And in late 2017, British politics equals volatility.

Domestic politics not exactly ‘strong and stable’

Far from providing ‘strong and stable’ leadership, Theresa May’s government appears to be inherently weak and unstable. So far May’s government has been caught between a thin majority in Parliament, a string of scandals involving ministers in her cabinet, and leadership challenges from senior Conservative Party rivals.

The latest scandal to threaten May’s government involves former foreign aid minister Priti Patel. Patel, who resigned yesterday after holding unsanctioned meetings with senior Israeli politicians, initially avoided being terminated from her role. According to the BBC, she resigned after it emerged that she had met with Israeli public security minister Gilad Erdan. She has also been forced to correct an earlier claim that the Foreign Office was informed in advance of her trip. Patel’s resignation follows that of Sir Michael Fallon, the former Defence Secretary. Fallon has been accused of serious sexual abuses while in Parliament. In a recent resignation letter, Fallon wrote that his behavior had “fallen short” of the standards expected by the UK military.  

While neither resignation is necessarily terminal for Theresa May, the continued instability of her government is negative for the pound. Earlier in the year, the currency was rallying after Theresa May had called elections in order to strengthen the Conservative Party’s position in Parliament. If the Conservatives had won an outright majority, the government would have had a much stronger hand when negotiating with the EU. Instead, May’s gambit backfired following poor national election results, and the Conservatives were forced to form a coalition government with the DUP. As May’s grasp on power continues to be weak, our view is that domestic politics is likely to remain a negative factor for the currency.