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The split in the U.K.’s opposition Labour Party will likely weigh on the pound and gilt yields as it increases political uncertainty, according to Mizuho International.
The move by a group of Labour lawmakers to quit the party and form an independent group could marginalize politicians in favor of keeping close links with the European Union or avoiding Brexit altogether, raising the odds of a no-deal outcome, according to the bank.
Sterling has lost more than 1 percent in February and 10-year U.K. bond yields have dropped to an eight-month low as Prime Minister Theresa May struggles to gain EU concessions to make her divorce deal palatable to lawmakers at home. The Independent Group of Members of Parliament formed by the ex-Labour lawmakers could see some pro-EU Conservative Party members also join, and raises the chance of a harsh Brexit, according to Mizuho.
“This looks awfully like a bungled mess of the creation of a new party, which we think is more likely to be pound-negative, gilt-positive, by giving Brexit a less effective opposition,” Peter Chatwell, head of European rates strategy at the bank, said in emailed comments. It leaves the “Conservatives and Labour with clear pro-Brexit mandates.”
The pound rose 0.3 percent Monday to $1.2930. The yield on 10-year government bonds was little changed at 1.16 percent, after dropping six basis points this month.
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