Theresa May is the new Prime Minister of the UK. Regardless of your political leanings the value of Sterling against the US Dollar tells us that this is good news for our currency. But why does the quick appointment of a new leader make our currency stronger?
The one thing markets hate more than anything else is uncertainty and the UK’s vote to leave the European Union (EU) sparked just that. In one morning future trade agreements became unclear, a leader resigned and divisions in the UK became apparent.
This sparked a sell-off in UK equity and Sterling. In a single day markets dropped below levels hit during the financial crisis. It took just one weekend for the major ratings agencies to downgrade our credit rating from AAA to AA.
Uncertainty continued into the last week of the quarter as discussions with the EU broke down and it was unclear who would be running for the leadership of the Conservative Party. Rumours were rife as the media discussed second referendums and general elections.
Market volatility continued with the FTSE100 being up to pre-BREXIT levels by 1st July but the value of Sterling continued to drop.
Since it was announced on Monday that May would be the UK’s Prime Minister the pound has started to bounce back.
The value of Sterling against the US Dollar is around 10% lower since the result of the vote was announced. The benchmark for GBP against USD is 1.5, on the day of the referendum Sterling was sat comfortably at 1.49, by close of markets the following day it had dropped to 1.37.
Sterling continued to drop in the weeks following the referendum reaching its lowest point on the 7th July when it was valued at 1.29 against the Dollar.
The story started to turn around on 12th July after Andrea Leadsom withdrew from the leadership contest, confirming May as the future Prime Minister. May will be given a mandate from the Queen later today and it is anticipated that this will continue to have a positive impact on the value of the pound.
With the quick appointment of a new leader comes more certainty and this will serve to calm the markets. The road ahead will be bumpy and whilst ‘BREXIT means BREXIT’ it is still unclear what the future will hold. But one element of uncertainty sparked by the vote to leave has disappeared and it will be interesting to see how markets react in the coming weeks.