Sterling has a long way to fall, as snap election risk mounts in the U.K.
By Anneken Tappe
The U.K. could be headed to the polls again soon, and downside risk on the British pound, which has already come off its most recent highs, appears to be mounting.
Both sterling and U.K. Prime Minister Theresa May have had an uneasy week, marked by a one-month low for the currency on Thursday following a gaffe-ridden speech by May on the previous day.
See:U.K. leader Theresa May's slogan literally fell apart during her 'disastrous' speech (http://www.marketwatch.com/story/uk-leader-theresa-mays-slogan-literally-fell-apart-during-her-disastrous-speech-2017-10-04)
Pressure is mounting for May to quit her post as prime minister, according to a report by The Telegraph (http://www.telegraph.co.uk/news/2017/10/05/theresa-may-future-conservative-leader-latest-updates/). "Quite a few firmly want her to resign," the paper wrote quoting a member of parliament Ed Vaizey saying.
"There is material downside risk for sterling," said Adam Cole, chief currency strategist at RBC in London. "The risk is almost entirely negative." The thought of May leaving a post that she only assumed in the wake of Britain's vote to exit from the European Union back in late June of 2016 is unsettling for currency traders because it creates uncertainty about U.K. leadership at a crucial time of renegotiations of key trade agreements in the wake of Brexit.
Cole's target for the pound versus the U.S. dollar was in the low $1.20-area. The currency pair traded at $1.3133 on Thursday.
"The risk of an election before the five-year term is up is high," according to Cole. Though another snap election in 2017 might be less likely given that there are less than three months left in the year, it could certainly be on the calendar for next year, he suggested.