(Bloomberg) -- The sexual harassment scandal engulfing Westminster is a tail risk for the pound, according to Nomura International Plc and Mizuho Bank Ltd.
Although recent moves in sterling have been driven mainly by the Bank of England and Brexit, investors are nonetheless wary of developments in Westminster after Prime Minister Theresa May’s already-fragile government saw cabinet minister Michael Fallon resign following claims of harassment.
“The Westminster scandal is definitely on the radar,” said Jordan Rochester, a currency strategist at Nomura. However, “the resignation of cabinet ministers would only be market moving if it saw key ministers such as the Chancellor or Brexit figures have to leave.”
Market participants drew parallels to John Major’s government from 1992, which gradually lost its 21-seat majority to defections, by-elections and scandals and became a minority government for a short time.
With May’s working majority at 13, resignations large enough in number to trigger by-elections would raise concerns over the Prime Minister losing her ability to hold government, said Rochester.
“It could be highly relevant for the pound,” said Neil Jones, head of hedge-fund sales at Mizuho. “It’s not so much for Fallon per se but more what else lies below. Imagine what else could come out.”
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