Pound Traders in Flash-Crash Flashback as Tory Conference Starts

(Bloomberg) -- Pound bulls have good reason to be nervous this week.

Sterling traders are anxiously watching the Conservative Party conference after U.K. Prime Minister Theresa May’s speeches at the previous two annual gatherings prompted declines. With May facing potential leadership threats and her Brexit stance under intense scrutiny, investors fear another white-knuckle ride.

May’s position is looking tenuous once again. Her so-called Chequers blueprint for Britain’s exit from the European Union has been bluntly rejected by both the bloc’s leaders and members of her own party. Her former Foreign Secretary Boris Johnson dismissed it as “entirely preposterous” in a Sunday Times article, after publishing his own plan last week in a move widely interpreted as preparing the ground for a potential leadership challenge.

“It’s difficult to ignore the potential downside risks stemming from U.K. politics over the coming week,” said Viraj Patel, a currency analyst at ING Groep NV. “We wouldn’t be surprised to see a hat-trick of GBP sell-offs if the Prime Minister has another difficult conference.”

The previous two Conservative annual gatherings have demonstrated their ability to move the pound. In 2016, May surprised investors by indicating a preference for a so-called hard Brexit, setting the scene for a flash crash in the currency two days later that saw it touch its weakest level since 1985. Last year, May’s mishap-filled speech spurred speculation of a leadership challenge, prompting the pound to drop to a one-month low in the days after.

With Johnson circling and several other prominent Tories in open opposition to May’s Brexit plans, speculation of a rebellion is high. The main events for traders to watch will be Johnson’s speech at a fringe event on Tuesday, and May’s closing speech on Wednesday. On Monday, Chancellor of the Exchequer Philip Hammond and Brexit Secretary Dominic Raab are due to speak.

“I must say it does make me a little nervous being bullish sterling,” said Allianz Global Investors U.K. portfolio manager Michael Riddell, who is opting for out-of-the-money call options to profit from a large unexpected rally in the pound. “They have a habit of saying things that markets don’t like.”

If traders can tear themselves from the political drama, the most important economic indicators will probably be a series of activity surveys through the week, as well as public appearances by Bank of England policy makers Silvana Tenreyro, Andy Haldane and Jonathan Haskel.

The pound gained 0.1 percent to $1.3049 on Monday after IHS Markit’s Purchasing Managers Index unexpectedly picked up in September.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Scott Hamilton, Anil Varma

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