Pound rallies as UK PM May seen surviving confidence challenge

The pound headed for the biggest gain in a month on increased confidence UK Prime Minister Theresa May will survive a leadership challenge, amid reports that she had the backing of a majority of Conservative Party Parliament members.

Sterling gained almost 1% against the dollar and gilts fell as the BBC reported that 158 Tory Party lawmakers have now said they will support May in Wednesday’s vote. While the vote will be held in secret, supportive comments by many politicians have helped temper market concerns about the political risks. Implied volatility on overnight pound-dollar options soared to the highest level since June 2017.

“Markets continue to price out the possibility of a loss,” said Mikael Olai Milhoj, an analyst at Danske Bank A/S. “The hardliners are very attention-seeking but only make up a minority of the Conservative MPs.”

Wednesday’s rally only takes the pound back to where it was early Tuesday, after plunging on Monday as the Prime Minister delayed a crucial Brexit vote. The currency remains vulnerable to headlines, according to Nomura International Plc.

Sterling climbed 1 percent to $1.2606, after earlier falling to $1.2478, the lowest since April 2017. The currency gained 0.5% to 90.14 pence per euro. Government bonds fell, with 10-year yields rising four basis points to 1.23%, while the benchmark FTSE 100 Index rose 1.7%.

Sterling could drop 3% on a trade-weighted basis within days if May loses the vote of confidence, and could climb 1 to 2% if she survives, according to Nomura International.

May won support from senior allies in her government, including potential leadership rivals such as Foreign Secretary Jeremy Hunt and Pensions Secretary Amber Rudd. If a majority of Tory lawmakers vote that they have confidence in May, she cannot face another such vote for a year.

“While the risk of ousting PM May has clearly increased, I don’t think that there is a credible candidate to replace the PM and who can make the no confidence vote successful,” said Valentin Marinov, Credit Agricole SA’s head of Group-of-10 currency strategy.