For all her incompetence and many, many missteps, I sort of feel sorry for British Prime Minister, Theresa May. We have all had a coughing fit. I have had several when speaking in public. It is really embarrassing but they are unavoidable. She just happened to have hers during a speech to the Conservative Party faithful in Manchester. It wasn’t her fault that she became an internet laughing stock when a sign behind her fell apart or that a comedian hijacked the speech. The timing just could not have been worse given her lack of credibility.
What is becoming increasingly clear is that Boris Johnson wants to be Prime Minister and that he wants the Brexit that he believes the UK people voted for. He appears to be single minded in this approach and the economic consequences that many of us foresee over the course of the next three to four years that a hard Brexit would produce, are a small price to pay for the end result which is his version of the future of Britain.
You can agree or disagree with Mr. Johnson’s views on how Brexit would look but there are a couple of things that are near certainties should he challenge for the leadership and if he were to win. None of them are positive for the future direction of the pound. If he challenges because he is not happy with the terms of the current negotiations, the pound will fall.
The rebound in the pound in recent months has been driven by three factors: 1) Weakness in the USD, 2) a more hawkish Bank of England and 3) a more conciliatory tone by Theresa May towards Brexit negotiations. While a challenge by Mr. Johnson wont directly affect the first two factors, it would throw the terms and character of the negotiations into turmoil. A successful challenge brings the concept of hard Brexit back on the agenda and it is difficult for me to see how the GBPUSD doesn’t quickly trade sub 1.25 before the end of the year.
We don’t know the timing of any potential challenge. Frankly, we cannot be certain one will come at all but the rumblings are becoming louder and I see next to nothing that can clear the air except for a leadership spill. The only pound positive scenario I would envision would be if Mrs. May was to defeat Mr. Johnson, which would show that the wounded Mrs. May and her Brexit strategy has the endorsement of the Conservative Party as a whole. Anything less and there are very few scenarios to own UK assets on an unhedged basis.