With looming dark clouds on Theressa May’s leadership, the pound takes a more cautious approach

In the backdrop of Brexit negotiations, one of the most complex high stakes negotiations in recent history after WW2, British Prime Minister Theressa May is now facing a challenge to her leadership from her own conservative party midst a lack of real progress in the divorce talks. There is more at stake here, for Britain, than just its forex market.

On Monday, the British pound tread on a slippery slope with signs of fresh trouble appearing in British Prime Minister Theresa May’s path: there have been media reports that 40 Conservative MPs are preparing for a leadership challenge.

The sterling was down by 0.55% and came to rest at $1.3120 breaking from its climb on the back of better-than-expected economic data from the British industry.

These development comes at a time when Brexit negotiations, are at a crucial stage.

The greenback saw wide gains against a basket of currencies with investors eyeing a potential overhaul of the U.S. tax regime.

“There were some headlines released over the weekend that were negative for prime minister May, and the market began the week by digesting the reports and then sending the pound lower,” said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.

Over the weekend, the Sunday Times reported, 40 members from British May’s Conservative Party have agreed to sign a letter of no-confidence. They are short of 8 votes that are required to trigger a change in the party’s leadership.

On Sunday, David Davis, Britain’s Brexit minister, made it lucid that Britain will neither provide a formula nor a figure as to how much, it believes, it owes the EU, highlighting the lack of progress in Brexit negotiations.

The pound was down by 0.45% at 149.12 against the yen.

“The sharp rise by Treasury yields certainly is not hurting the dollar. But the yield rise appears mostly technical in nature – the recent flattening trend is being unwound – so the positive impact on the dollar is limited,” said Masafumi Yamamoto, chief forex strategist at Mizuho Securities in Tokyo.

Bond traders have favoured longer-dated treasuries over their shorter-dated peers on concerns that the potential overhaul of the U.S. tax regime is likely to diminish the introduction of the issue of a new treasury bond that extends beyond thirty years.

As a result, the spread between the two-year and 10-year Treasury yields have reached to their lowest since 2007 last week, before nudging up slightly.

“In my view, the U.S. tax reform talks are proceeding roughly according to schedule. It cannot get much worse, and this is a supportive factor for the dollar,” said Yamamoto at Mizuho Securities.

The Australian dollar also lost 0.05% and came to rest at $0.7655 against the USD. At the end of October, the Australian dollar was at its 3-1/2-month low of $0.7625. The currency has come under increasing pressure with the greenback shrinking to its narrowest since 2001.

The forex market has almost ruled out the possibility of a rate hike in Australia while almost fully pricing a rise of the USD for December.

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