10-6-17 8:14 AM EDT | Email Article

By Sara Sjolin, MarketWatch

An ouster for May could bring in a leader softer on Brexit -- or a new general election

It's been a rough week for the pound and Theresa May -- and the turbulence looks set to continue, as the plots to bring down the British prime minister thicken.

After her "disastrous" speech at the Conservative Party's annual conference (http://www.marketwatch.com/story/uk-leader-theresa-mays-slogan-literally-fell-apart-during-her-disastrous-speech-2017-10-04) on Wednesday, the British leader is battling mounting pressure to resign -- with the knives out even within her own party.

"Quite a few" discontented Tory members of parliament want May to step down, according to a report in the Telegraph (http://www.telegraph.co.uk/news/2017/10/05/theresa-may-future-conservative-leader-latest-updates/). Conservative bigwig Grant Shapps says (https://www.theguardian.com/politics/2017/oct/06/tory-ministers-privately-agree-theresa-may-should-go-says-grant-schapps) he has a growing list of at least 30 rebels ready to push for a new leader, including some former and present ministers.

What could happen next

-- The rebels could fail to sign up the 48 MPs needed to trigger a leadership election, and May clings onto power.

-- May gives in to pressure and resigns, and the leadership race begins. Conservatives could take up to three months to decide on who follows her.

-- May goes, and an unopposed consensus candidate to replace her is named, avoiding a drawn-out contest.

-- A general election is called, though this is not a legal requirement. The Conservatives could carry on with their minority government with a newly elected leader, who would be the new British prime minister.

-- There is the risk that an election -- the second snap or out-of-cycle ballot this year -- could bring in Labour and its hard-left leader Jeremy Corbyn to power, who's currently ahead in the polls. That means the U.K. could end up with a leader and government that is less wedded to a hard Brexit than May and her cabinet.

What are the odds on May holding onto power?

Paddy Power has significantly shortened its odds on an imminent exit for the British prime minister. The Irish bookmaker is offering odds of 2/1, or 33% probability, on May quitting this month, down from 5/1, or 17% probability, yesterday.

The bookie also said it sees a 31% chance of a general election in 2018, four years earlier than what's currently planned.

"Whenever she goes, Paddy Power are convinced that she is going, and soon -- they make it odds-on that May stands down within a year," the company said in a press release. It's estimating a 67% probability that May will leave 10 Downing Street within the next 12 months.

The bookie also said it sees a 31% chance of a general election in 2018, four years earlier than what's currently planned.

Read:Sterling has a long way to fall, as snap election risk mounts in the U.K (http://www.marketwatch.com/story/sterling-has-a-long-way-to-fall-as-snap-election-risk-mounts-in-the-uk-2017-10-05).

Why investors should care

Sterling has borne the brunt of the political drama, now trading around the lowest level in a month at $1.3066. With the losses incurred this week, the pound is also set for its biggest weekly loss (http://www.marketwatch.com/story/british-pound-drops-set-for-worst-week-in-a-year-on-talk-of-early-uk-election-2017-10-06) since October last year, when it tumbled 4.1% against the dollar following a flash crash.

Analysts are worried the Westminster uncertainty will threaten Brexit negotiations between the U.K. and Brussels, which would pile even more pressure on the pound.

Plus, the political turmoil weakens the case for the Bank of England raising interest rates in November -- something traders are banking on, right now.

What analysts are saying

-- "The instability seen throughout the U.K. has continued apace, with a lackluster appearance from Theresa May leading to speculation that she could quit. As polls continue to show May losing ground on Corbyn, there is reason to believe that she could be pushed out in a bid to improve the party's chances at the next election.

Unfortunately, with Brexit negotiations already experiencing a spluttering start to Brexit negotiations, another leadership contest threatens to further derail the talks in the name of improving the party's domestic popularity." -- Joshua Mahony, market analyst at IG

-- "While certainly not our base case, a scenario in which PM May steps down -- and a Tory Party leadership contest in the near-term -- is one that would weigh heavily on GBP. First and foremost, it would pose major doubts over a November BOE rate hike -- which markets are all but pricing in at this stage (75% probability).

A dovish BOE re-pricing on its own could see GBP/USD tumble below $1.30, while an increase in the short-term political risk premium priced into the pound could fuel the move lower towards $1.26-$1.27 (EUR/GBP to 0.94). Downside GBP bets likely to pick up." -- Viraj Patel, foreign exchange strategist at Rabobank

-- "More self-indulgence from Conservative party MP's over the future of Prime Minister Theresa May has pushed the pound back to levels last seen at the beginning of August. Even if they were able to get her to step down it is not immediately clear who would replace her. Foreign Secretary Boris Johnson has put quite a few noses out of joint with his recent behavior and might prove to be quite divisive, while none of the other possible candidates would appear to have the required support.

It seems likely that this discontent will once again amount to nothing more than hot air in the short term at least. The last thing the currency, the Conservative party and more importantly the country needs right now is the self-indulgence of another leadership battle." -- Michael Hewson, chief market analyst at CMC Markets UK

-- "Investors are taking some sterling exposure off the table here -- and indeed have been ever since May's lackluster Florence speech. But it seems unfair to write her political obituary just yet. In the absence of any viable candidates and Labour knocking on the door making an election unpalatable to the Tory party, she is likely to soldier on.

Worries about the economy -- and therefore the Bank of England's willingness to raise rates -- are of equal concern and this is perhaps why sterling is back to where it was before the September 14 MPC hawkishness." -- Neil Wilson, senior market analyst at ETX Capital

-Sara Sjolin; 415-439-6400; AskNewswires@dowjones.com


(END) Dow Jones Newswires

10-06-17 0814ET

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