The Pound’s Fate Hangs On Johnson's Replacement


The Pound’s Fate Hangs On Johnson’s Replacement

(Bloomberg Opinion) — The face of Brexit has turned away. Boris Johnson stepped down as Foreign Minister on Monday, joining David Davis, the recently departed Brexit secretary, outside the big tent of British government.

With their departure, May has rid herself of the two most challenging members of her cabinet. The question for sterling is whether she gives herself a headache of her own making.

The political flaps gave the currency a tough time. I wrote that the pound’s weakness was best understood as a case of dollar strength, underpinned by the fact that the vast majority of May’s cabinet had stood behind her soft-Brexit plan. Johnson’s resignation showed that traders have their limits in looking through the shifting winds of domestic politics – the pound gave up all of its gains, to wind up back where it was on Friday.

Assuming May avoids an immediate leadership challenge, what matters for sterling now is who replaces Johnson. Michael Gove, environment secretary, is a face that’s friendly for Brexiteers. Liam Fox, secretary for international trade, would also be someone they could live with. Either would be fine for the role.

With both of them remaining on board, alongside Dominic Raab as Davis’s replacement, there’s sufficient representation from the Brexit camp in the positions that are key for the outcome of the divorce. This will go a long way to getting backbenchers to accept May’s vision of a softer Brexit, making its realization much more likely. This should be reassuring for sterling.

This arrangement would by no means suggest that she has anything like a clear path through to the end of March. The European Union has yet to give its assessment on her proposal, and they could continue with their line that the U.K. offering is insufficient. A “no deal” Brexit can’t be ruled out. Having played hardball with her cabinet, she would be left having to play hardball with Brussels.

There’s a way the outcome could be much, much worse for the currency. Were Gove to resign, May’s Conservative party would fracture – if it hasn’t already. Leave aside who would win a leadership challenge – the point for Brexit is that it would delay the divorce negotiations for three months.

That’s a terrible outcome for sterling, as it makes a “no-deal” Brexit much more likely. On the current timetable, by October the whole structure of the deal should have been pretty much agreed by both the U.K. and EU. A leadership challenge would make this impossible to achieve.

And the pain would be doubled. The collapse of May’s progress would make it much harder for the Bank of England to raise its key interest rate next month. Governor Mark Carney had predicated policy makers’ projections on a smooth exit from the bloc, and now that would be extremely unlikely. In that environment, sterling could start making its way toward the lows it achieved after the referendum in 2016.

Johnson’s departure was news for the pound. But what really matters is what happens next.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.

Comments

comments