Pound slides as British government faces turmoil

The British pound dropped Monday after weekend news reports that several members of Parliament want Prime Minister Theresa May to resign, the latest sign of turmoil in the British government.

What markets are doing: Sterling
GBPUSD, -0.8074%
declined almost 0.8% against the U.S. dollar to $1.3092. The pound has advanced 6.4% against the dollar this year but remains down about 12% since the U.K. voted to leave the European Union in June 2016.

The pound
GBPEUR, -0.3900%
fell 0.3% against the euro to 1.1246, after being down as much as 0.5%, and lost 0.9% against the
GBPJPY, -0.91%
yen on Monday. Meanwhile, the euro
EURUSD, -0.2015%
was down 0.2% against the dollar.

Whats moving markets: The Sunday Times reported over the weekend that 40 lawmakers had agreed to sign a letter of no confidence in May. Just eight more MPs are required to start a formal leadership challenge, according to the report.

Analysts say political developments are likely to be the most important factor guiding the pound in the coming months, given the Bank of Englands cautious outlook on interest rates. The central bank penciled in just two more quarter-point increases by the end of 2020 as it raised its benchmark interest rate for the first time in a decade earlier in November.

What strategists are saying: Brexit risks and the stability of the government have pushed to the top of the list of priorities as far [as] the FX outlook is concerned, analysts at Macquarie Bank in Singapore wrote in a note on Monday.

Markets ended last week with a risk wobble as [emerging markets] and [high yield] spreads widened and [government] yields rose. This morning, all about 40 MPs losing confidence in [Theresa] May. [The pound] is down. But U.K. govt shambles is mostly priced in [and] change can be good, said Kit Juckes, global fixed income strategist at Societe Generale, in a post to Twitter.

Conservatives in trouble: Mays Conservative Party, which lost its majority in Parliament in a June election, has been plagued by scandals that have led to the resignations of two ministers this month. Priti Patel, the international development secretary, resigned last week after details emerged about her unauthorized meetings with Israeli officials, while Defense Secretary Michael Fallon resigned earlier in November after allegations of inappropriate conduct toward women.

See: Is British leader Theresa May on her way out? Why thats the fear and why it matters

The U.K. is also facing growing pressure from Europe about its plans to leave the EU, which is scheduled for March 2019. On Friday, the EUs chief Brexit negotiator gave the U.K. a two-week deadline to show that sufficient progress has been made on a trio of divorce issues for talks to move forward.

European leaders including German Chancellor Angela Merkel and French President Emmanuel Macron are set to decide at a December gathering whether to authorize negotiators to proceed with discussing the U.K.s future economic ties to the bloc.

Read: Brexit hardliners are selling England by the pound

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