Investments 

Sterling rises but uncertainty remains as May quits

Sterling rises but uncertainty remains as May quits

Sterling rose modestly against both the dollar and the euro as Theresa May announced her upcoming resignation as Britain's prime minister.

Mrs May announced this morning she would stand down as leader of the Conservative Party on 7 June, paving the way for a replacement as prime minister to be chosen.

The FTSE 100 was less than 1 per cent higher following Mrs May's statement while sterling reversed its fall of the past few weeks, rising by 0.46 per cent to $1.27.

At the beginning of May sterling was valued at $1.31 but it has been falling all month - reaching $1.26 yesterday - as the market took the view that the success of the Brexit Party in opinion polls and the possibility of Mrs May being replaced by a leader who was more likely to want a no-deal Brexit.

Silvia Dall’Angelo, senior economist at Hermes Investment Management, said: "Looking ahead, a new leader is unlikely to bring the country closer to a solution for the Brexit dilemma. For a start, the parliamentary arithmetic would not change: while there is a majority against a no-deal Brexit, there is no agreement on the way forward.

"The risk is that under the next leader - most likely coming from the intransigent Eurosceptic wing of the Tory party - the institutional tensions between the executive and parliament will intensify, potentially generating an even more fragmented and dysfunctional political landscape.

"The next stage will probably result in early general elections, but other outcomes are possible, including a second referendum and a no-deal Brexit (the latter being the default scenario under current Brexit legislation).

"At any rate, the Brexit situation is unlikely to be resolved any time soon, and uncertainty will persist, which will continue to weigh on the country’s economic prospects and financial assets."

The most recent figures for UK inflation showed it rose above 2 per cent in April, which was above the Bank of England’s target rate of 2 per cent.

The increase came as a result of higher fuel costs which, due to the fact fuel is priced in dollars, was a result of weaker sterling.

Core inflation was 1.8 per cent, unchanged from the previous month. Core inflation measures the movement of prices of goods and services, but excludes volatile items such as fuel and food. As such it can serve as a measure of the level of demand in the economy.

Edward Park, deputy chief investment officer at Brooks Macdonald, said: "Sterling is 3.5 per cent lower versus the euro and dollar since its highs in early May due to Brexit uncertainty - the relatively modest bounce today is due to better than feared UK retail sales rather than the prime minister's departure, which will increase short term uncertainty, keeping sterling under pressure."

david.thorpe@ft.com