A real Labour split won’t guarantee a surge in sterling
Investors who are predicting a sterling rally if there if a full-blown split in the UK’s opposition party are likely to be sorely mistaken.
The Labour party has leaned increasingly to the left since Jeremy Corbyn took the reins in 2015.
Many currency experts have warned about his policies, saying that they fear a Labour government would be more negative for sterling than any disastrous Brexit outcome.
Seven Labour of Labour’s 256 MPs split from the party yesterday, citing its direction on Brexit, as well as a failure to address antisemitism in its ranks.
There is now natural speculation that more could follow, ripping a gaping hole in the UK’s second-largest party.
While this might diminish Corbyn’s chances of being Prime Minister, a sterling surge is not guaranteed.
“Perhaps at the margin you could argue it’s GBP positive,” says Stephen Gallo, the European head of foreign exchange strategy at BMO Capital Markets.
“But a Labour split would mean that a single party might not necessarily have a chance of forming a stable government in the event of a General Election, and that is also a factor GBP bulls need to be wary of.”
Gallo’s hypothetical argument is that a snap election this year could also prompt a split in the Conservative party, particularly given that its own Brexit rebels are showing frustration at the current management.
“Who wins a majority in the House of Commons in this scenario? Answer: perhaps no one,” he adds. “There is no easy way out of this, unfortunately – for the pound or for Britain.”
The pound barely acknowledged the seven resignations on Monday, with Simon Derrick, chief currency strategist at BNY Mellon, explaining that the “jury is out” on what this means for the long term. “The most immediate question is whether this makes a second Brexit referendum more or less likely. I don’t know. It’s clear that political commentators are asking the same question,” he says.
Peter Chatwell, an interest rate strategist at Mizuho, calls the creation of the new party on Monday a “bungled mess”, saying that it gives Brexit a less effective opposition and would be a sterling negative.
With currency traders already dealing with numerous Brexit permutations, a Labour split would only complicate a sterling trade that’s looking increasingly difficult to call.