(Bloomberg) -- The pound rallied as the market judged U.K. Prime Minister Theresa May may survive a threat to her leadership launched Wednesday.
Sterling recovered from a 20-month low and gilts fell after May said she would contest a vote of no confidence and many of her Cabinet ministers came out in support of her. Options betting on overnight pound-dollar volatility soared to the highest since June last year, ahead of the vote Wednesday evening.
“My expectation is May will actually survive the vote of no confidence and that’s probably the market’s too, helping the pound for now,” said Neil Jones, head of currency hedge fund sales at Mizuho Bank Ltd.
The U.K. currency could also be benefiting from traders covering their short positions put on after speculation of a challenge Tuesday evening, according to Ned Rumpeltin, head of foreign-exchange strategy at Toronto-Dominion Bank. Sterling traders appear to be operating on a sell-the-rumor, buy-the-fact strategy, said Mizuho’s Jones.
Sterling climbed 0.4 percent to $1.2539 by 9:27 a.m. in London, after touching $1.2478, the lowest since April 2017. The currency gained 0.3 percent against the euro to 90.34 pence per euro. Government bonds fell, with 10-year yields rising two basis points to 1.21 percent, while the benchmark FTSE 100 Index rose 0.8 percent.
Sterling could drop 3 percent on a trade-weighted basis within days if May loses the vote of confidence, and could climb 1 percent to 2 percent if she survives, according to Nomura International.
May won support from senior allies in her government, including potential leadership rivals such as Foreign Secretary Jeremy Hunt and Pensions Secretary Amber Rudd. If a majority of Tory lawmakers vote that they have confidence in May, she cannot face another such vote for a year.
“While the risk of ousting PM May has clearly increased, I don’t think that there is a credible candidate to replace the PM and who can make the no confidence vote successful,” said Valentin Marinov, Credit Agricole (PA:CAGR) SA’s head of Group-of-10 currency strategy.