UK Prime Minister Theresa May has (finally) announced her intention to stand down. On 7th May she will resign as leader of the governing Conservative Party at which point there will be a leadership election of who to replace her. Once that process has been resolved, Mrs May will step down as Prime Minister. The implications could be significant for Brexit and sterling.
A successor to Mrs May and the next UK Prime Minister
For weeks it has been open season on who is set to replace Mrs May. There is a very clear front runner amongst the Conservative Party grassroots membership. Boris Johnson may be seen as a bumbling buffoon by many in the country, but he is clearly viewed in a different light in the Tory membership (see below). However, Johnson needs to court the support of MPs in order to get himself through to the final two which then get put to a ballot by party members.
According to betting company Ladbrokes, the odds for the next leader suggest that a Brexiteer will become the next Prime Minister (see below). Boris Johnson (former Foreign Secretary) and Dominic Raab (a former Brexit Secretary very briefly) are the early front runners for the final two. However, it is still very early in the process and a lot can change. Boris Johnson has never been a huge favourite amongst Tory MPs and may struggle to get through to the final run off. However, Johnson is considered to be less extreme Eurosceptic than he is perceived to be. Those that know him well refer to him as more of a “One Nation Tory”, so far less aligned to the right wing of the Conservative Party than is generally accepted.
Implications for Brexit
Mrs May was always a “remainer” trying to deliver Brexit. In her heart of hearts, she never believed in using “no deal” as a realistic bargaining chip. Perhaps with a Brexiteer Prime Minister, this would change? Boris Johnson has already alluded to this. The deadline for the end of Article 50 has been extended to 31st October, but the Parliamentary arithmetic is just not there to get any realistic form of Brexit through. This raises the prospect of the UK leaving the EU with no deal (one of the key reasons behind why sterling has fallen recently). A new leader would have to apply for a further extension on Article 50 in order to renegotiate with the EU, but the EU could reject this. Also there is no reason why the EU would change key elements to the Irish Backstop anyway.
The probability of “no deal” Brexit has grown with Mrs May’s departure and we believe it is around 20% currently. Not only arising from a new Prime Minister’s willingness to play this card, but also from a potential accidental “no deal” as the EU denies a further extension.
However, would Parliament accept “no deal”? The likelihood is that a remain leaning Parliament (which has already shown its intention to reject “no deal”) would move to prevent it from happening. If this cannot be achieved through a binding vote (less likely now) then a vote of no confidence would surely be called. Moderate Tory MPs could vote against their own government (former attorney general Dominic Grieve has suggested as much). This could lead to a general election, with subsequent second referendum possibilities. The probability of a general election has grown and is around 50% now.
The remaining 30% probability is that a new leader manages to get a Brexit deal (of some form) through Parliament. Again this is unlikely, but still possible. At this stage little is known about the visions of Brexit of Mrs May’s successor.
Impact on sterling
The immediate reaction on Cable was to pop 60 pips to the upside. Sterling has been pressured for the past couple of weeks as the political pressure has ramped up on Mrs May in light of terrible local and now European election results. However, a near term relief rally on sterling seems to have lasted less than a few hours as this rally has dissipated. This seems indicative that the market cannot see any sustainability in sterling strength right now. Not with the elevated prospect of “no deal”, but also the elevated prospect of a General Election (and by extension a socialist Labour government).
Target areas for GBP/USD of the potential destinations ahead:
At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.