Party Conference and Sterling

Discussion and Analysis by Charles Porter:

In theory, the Conservative Party Conference taking place in Manchester could boost the Pound Sterling. This is because it is an opportunity to bring all Conservative Party MPs and Ministerial Cabinet Members together and provide a coherent and harmonious vision of their leadership intentions. However, the content, disorder and context behind the Conference over the past two days has undermined, and even reversed, this possibility.

Whether Sterling’s performance today is entirely attributable to the Conservative Party conference is highly doubtful. Without reservation, the complex political economy within which the UK finds itself is undoubtedly responsible for the volatility and underperformance of Sterling, to a significant extent. However, it is with similar confidence that I can assert that some of the losses that Sterling has encountered throughout the trading day, across most currency pairs, is partially down to the conference.

Theresa May’s Conservative Party proudly grasped the opportunity to demonstrate unity in Florence. By turning up alongside the foreign secretary, Boris Johnson, her secretary of state for exiting the European Union and lead negotiator, David Davis, and the Chancellor of the Exchequer, Phillip Hammond, May signalled a unity amongst key members of her front bench. However, following a widely followed interview with Andrew Marr on the eve of the Conference, May’s leadership capacity within an uncontrollable Cabinet, with “unsackable” members is being questioned.

As such, a sign of unity and strength may have awarded credibility to the incumbent government. Leadership credibility boosts the strength of the currency, in this case the pound, because it signals a capacity to achieve regulatory progress and assert control over the polity and economy. May’s speech was a particularly politicised speech, aggravating many watchers and voters by failing to answer directly a vast number of questions proposed to her.

Therefore, the reality of the conference so far is surprising and harmful to the Pound. The negative campaign deployed at the conference, one in which the Chancellor, Phillip Hammond, accuses the opposition party of undermining the UK economy without even acceding to power, is not what the party and currency alike need to recover. Therefore, the inverse impact upon the economy and exchange rate occurred; the Pound Sterling trades down against most other currencies, including the Euro and US Dollar.

Whilst there is still a considerable portion of the Conservative Party Conference yet to speak, particularly tomorrow’s appearance of Liam Fox, Secretary for International Trade, alongside David Davis, some damage has been felt within the Pound today. Following Davis’ appearance, Boris Johnson, the unsackable Member himself, will speak alongside other noteworthy Conservative Party Members. Political pessimism has been priced into Sterling ever since May’s failure to secure a Conservative Majority within the House of Commons in the snap election. Therefore, whilst UK data releases remain sparse and as the Conference continues, considerable upside and downside risk will manifest making Sterling considerably volatile this week.