How Might Currencies React to Theresa May

The weeks leading up to the EU referendum and the actual Brexit decision triggered a lot of uncertainty for the UK economy, dragging the British pound lower against its forex peers in the process. After all, this was immediately followed by David Cameron’s decision to step down as Prime Minister, leading market participants to worry who would take the lead in negotiations with EU officials.

A bit of calm returned to the markets after Home Secretary Theresa May emerged as the frontrunner in the leadership race, particularly when rival Andrea Leadsom stepped aside. This paved the way for Cameron’s official resignation last week and May’s proclamation as Prime Minister.

Who is Theresa May?

Born in Sussex but raised in Oxfordshire, Theresa hails from a middle class background, similar to the first female Prime Minister Margaret Thatcher. She studied in Oxford University where she met her husband Philip then graduated with a degree in Geography.

Theresa May first worked at the Bank of England, giving her a strong background on economics and monetary policy. She soon rose to be the head of the European Affairs Unit of the Association for Payment Clearing Services. Soon after, she was elected as a local councilor in Merton, marking her first foray into politics.

She became the shadow leader of the House of Commons around 2005 then became shadow work and pensions secretary four years later. When the Conservatives and Lib Dems joined forces for a coalition government, Theresa May was promoted to the job of Home Secretary, taking strong stands on issues like immigration, internet surveillance, and police corruption.

Brexit Plans

Theresa May actually voted to remain in the EU but maintained that “Brexit means Brexit” dousing speculations that a second referendum will be held in the UK. She has stated that official negotiations won’t start until the British government invokes Article 50 of the Treaty of European Union, which probably won’t take place until the end of the year at the earliest. This should give time for UK government officials to draft their plans and prepare contingency measures to ensure the stability of the economy.

For now, May has assured that the status of EU nationals in the UK won’t change until new agreements are made, also restoring a sense of calm for other euro zone nations. Still, she has reiterated that the UK needs to maintain its trade ties with the EU while establishing more control on its borders.

May has been known to take a hardline stance on immigration in the past, as her recent Immigration Act was designed to make things difficult for illegal migrants. This would include measures including requiring landlords to check on the immigration status of their tenants, having targets for migration cuts, and refusing to put a time limit on immigration detainees.

Judging by the British pound’s reaction to her appointment, traders seem to agree with the “safe pair of hands” description that has been given to Prime Minister May. She is likely to stay in office until the next general elections in 2020, giving her and her cabinet enough time to weather any potential storms from the Brexit process.

She has also announced the formation of a Brexit department with a secretary of state at its helm to facilitate the negotiations, reflecting her plans to go about it carefully and refrain from shocking the markets. May has also decided to appoint pro-Brexit leaders as part of her cabinet, as she believes that these folks could have better bargaining points and arguments to smoothly transition out of the EU. She has told her cabinet members to make the Brexit a success for the UK, easing fears of a messy divorce from the rest of the union. Global equities took this positively, buoyed in part by stronger than expected Chinese data and upbeat US earnings to reach record highs this week.

This cautious wait-and-see approach was reflected in the Bank of England’s decision to hold its fire instead of immediately announcing an interest rate cut during their monetary policy statement last week. This kept a lid on the pound’s volatility as well as the euro’s.

What’s Next?

All eyes and ears are still on the announcements being made by Prime Minister May, especially since the BOE has refrained from overreacting to the Brexit vote. May has reiterated that it will be their duty to deliver success on behalf of everyone in the country and not just the elite, establishing her plans to focus on social justice during her term. She added that she plans on building on education, skills, and social mobility to allow everyone to benefit from opportunities in leaving the EU.

On the other side of the coin, many are now worried that the rest of the EU could be worse off without the UK. After all, the euro zone is dealing with financial troubles of its own, particularly in Italy, and the threat of contagion remains very real. Without the support of a strong ally like the UK, the region seems to be on less stable footing from here.

For now, traders are waiting on the European Central Bank’s monetary policy statement, as any signs of concern could weigh on the shared currency and overall market sentiment. As it is, a number of major central banks have indicated a slight shift to a dovish monetary policy bias in order to keep their own economies afloat if the economic and financial situation worsens. This could prompt a flight to safety, benefiting lower-yielding currencies like the U.S. dollar and the Japanese yen while leaving the riskier commodity currencies eating dust.

On the flip side, if central bank officials continue to reassure markets that turbulent moves can be contained, investor confidence could be restored in favor of higher-yielding currencies and assets. A lot still hinges on Prime Minister Theresa May and her government’s next moves, as these could dictate the future of the UK, the EU, and the rest of the global economy.