Following the latest failure of her withdrawal agreement, Theresa May’s premiership is over in any meaningful sense.  The only question is when she will finally announce her resignation, and what tone the race to replace her takes?

The latest news suggests that May is desperately trying to discuss what changes to her withdrawal agreement and Cabinet are necessary to bring a bill to Parliament, ahead of her meeting with 1922 chair Graham Brady tomorrow morning.

In the unlikely event that she can muster a cabinet willing to send a revised version of her Withdrawal Agreement Bill to Parliament, she will probably have to fight off a vote of no confidence in the 1922 Committee.

May faces slim chances of success in both endeavors following Andrea Leadsom’s resignation, as potential leadership candidates in the Cabinet risk going down with the ship if they sign up for another doomed vote in the commons.

May’s resignation could bring a perverse relief rally in sterling for no reason other than stretched short positioning and the end of an ineffectual prime minister. However, the case for sterling weakness remains compelling.

The key factor remains the risk of a ‘no deal’ Brexit. It looks like there are two main things to look at when judging no deal risk; firstly the tone of the debate to replace May, and secondly the willingness and ability of parliament to block a no deal.

Espousing a willingness to complete a no deal will probably be mandatory for aspiring May replacements, considering the savaging the Tories are receiving from the Brexit Party both in national polls and EU elections.

No deal rhetoric from leadership contenders is likely to weigh on sterling with last year’s lows below 1.25 on GBPUSD looking like a target.

This is especially true given how negative sentiment is currently and the fact global risk appetite is worsening due to the US-China trade war.

Parliament’s willingness and ability to block no deal is the most important single support sterling still has.

If a new Prime Minister is happy to proceed with no deal, they will not be required to bring any further amendable motions or bills to Parliament. Conservatives seeking to block no deal would have to vote against their own Government for a General Election – there’s no guarantee enough will do so.

If it looks like a new Government is heading for no deal and Parliament is unable to intervene, then GBPUSD will head to 1.20 and below.

Sterling’s performance in a general election really is anyone’s guess. Given the extreme uncertainty this scenario would introduce; both a rally and further losses are entirely plausible depending on polling and the outcome.


Author: Ranko Berich – Head of market analysis at Monex Europe.