A quick thought on UK politics. No reason to own the pound.

My structural bearishness towards the pound has been problematic in 2017 due to: 1) Weakness in the USD, 2) a more hawkish Bank of England and 3) a more conciliatory tone by Theresa May towards Brexit negotiations. Boris Johnson's ambitions are about to change all this.

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.

Comments (6)
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Rupert Mitchell
Rupert Mitchell

Editor

some of the recent data on business investment in the U.K. demystified. I don't think this remotely surprises us. Why business investment rose after the vote for Brexit

Paul Krake
Paul Krake

Editor

love the comment from one of the EU ambassadors. " We are not here to save the Conservative party"

Paul Krake
Paul Krake

Editor

as for the pound, firing Boris doesn't do much. beating him in a leadership challenge would.

Paul Krake
Paul Krake

Editor

Boris probably doesn't have the support of the centre but she has become a laughing stock and not just over Brexit. Grenfell Tower was a low point for her and the only reason she hasn't been challenged as yet is because the Brexit task is thankless and they can risk another election. I'm actually surprised Boris is choosing now to up the ante because it is tough to see how any leader beats Corbyn in the next election .

cal
cal

Well Boris's raison d'etre ever since London Mayor has been a move to number 10, this is not new. His Brexit leaning was about opposing Cameron, his recent outbursts re the transition period were to oppose May. Equally these 'leaked' whatsapp messages of support are to make him look like a team player - they are likely leaked by him after all. I think the Tories are trapped with their human bad-bank May for now - they can't afford a destabilizing challenge that could risk another election, and into the arms of Corbyn. And its not clear that Boris's harder version of Brexit has the center of the party. In the face of Germany backing away (even post-Florence) they are now faced with a decision on committing clarity to the divorce bill, before even securing the transition. Given the alternatives I think she sacks Boris and pays up. That would bounce the Pound. Boris will be back another time.



Paul Krake
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Ken_Dyks
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Paul Krake
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