Little solace in sight for pound as Britain political risks mount

Bloomberg

There is little on the horizon that can help the pound regain its footing as investors brace for subdued UK economic data and the risk of a euroskeptic prime minister.
Sterling fell for a third month against the dollar in May and touched its weakest level since January
versus the euro amid persistent market anxiety about Britain’s political upheaval and its implications for exiting the European Union. Morgan Stanley and ING Groep NV both cut their pound forecasts this week ahead of Theresa May’s official resignation on June 7, which would accelerate campaigns by Conservative lawmakers to take her place.
UK purchasing managers data for manufacturing and services to be released next week are forecast to show a subdued pace of growth.
“The prospects of a new euro-skeptic prime minister are unlikely to bode well for the markets,” said ING strategist Petr Krpata, who predicts the pound will drop about 5 percent to $1.20 in the coming months. “It should increase the perceived probability of a hard Brexit and this is a clear negative for sterling.”
After last month’s European parliamentary elections boosted Nigel Farage’s populist Brexit Party, markets are bracing for a harder line, anti-EU prime minister.
This has escalated the prospects of a messy divorce, according to analysts who have delayed their calls for Bank of England interest-rate hikes and lowered forecasts for the pound.
“The probability of a smooth and soft Brexit has reduced, in our view, with the Brexit Party winning the largest share of votes in the European elections and the departure of PM May,” said Hans Redeker, global head of currency strategy at
Morgan Stanley International. “The next Conservative Party leader is likely to favor a hard Brexit.”
The pound slipped against all of its Group-of-10 peers in May. It weakened 2.6 percent against the euro to 88.60 pence and 3.2 percent to $1.2620 last month, in London.
Morgan Stanley strategists predict sterling will slip to $1.24 by the end of September and to $1.27 by December 31, compared to previous forecasts of $1.32 and $1.38 respectively.