British politics has been in turmoil the past few weeks. The latest Brexit developments have resulted in several senior ministers resigning in protest of the direction the government is taking. While the recent events have put the future of the UK in further doubt, the GBP experienced a minor price increase. The GBP remained positive during the announcement of the resignations, and climbed to £1.02 against the dollar.
The two big resignations were former Brexit secretary David Davis and Foreign Secretary Boris Johnson. Both left in protest of the White Paper produced by Theresa May at Chequers. Witney MP Robert Courts also resigned as a parliamentary aide in protest of May’s desire to keep close trade ties with the European Union. Courts quit in order to express strong discontent with the current Brexit plan. On his private Twitter account, Courts said that it was a difficult decision to leave his post as Parliamentary Private Secretary (PPS) but also claimed it was a necessary move to vote against the government’s trade bill. Added to the list of significant exits was Steve Baker who relinquished his post as a Minister of the Department for Exiting the EU, and conservative vice chairs Ben Bradley and Maria Caulfield.
The resignation of key government employees hurt the pound initially. The sterling fell more than a cent against the dollar. However, the currency quickly rebounded as investors saw their departures as a sign that a soft Brexit was more likely to happen. A soft Brexit that is more inline with EU regulations, and closer to the Customs Market and Single Market is what business leaders have been pushing for since June 2016. The fear of a no-deal hard Brexit that would force the UK to follow WTO rules has been called the worst-case scenario.
The fact that the pound has reacted in this way is not surprising. Changes within a political party generally have a big impact on currencies especially in this instance when it directly affects Brexit negotiations. An economic event according to FXCM, is anything that may have a substantial bearing on a sector or market. Investors look at the economic calendar for guidance to base their future trading decisions upon. Any event that generates uncertainty, such as the Brexit negotiations or a number of politicians resigning, can lead investors to transfer their money to a more stable currency. When the referendum resulted in the UK deciding to leave the EU, The Guardian reported that the pound slumped to a 31-year low. Fear of price declines is the leading cause of currency instability, and right now the GBP is extremely volatile due to events surrounding Brexit.
While the GBP bounced back after politicians who sought a hard Brexit resigned, the BBC warns that the currency may slide further if Johnson decides to challenge May’s position for Prime Minster.
“The pound can handle ministerial resignations if that’s the extent of it…If it means Johnson leaving and not launching a leadership challenge,” said ING strategist Viraj Patel.
The Chief Currency Strategist at the New York Mellon Simon Derrick agrees that investors would be more cautious if May’s leadership is challenged.
“They are now going to start focusing far more on the potential political risks, they will focus on the possibility of a leader challenge, on broader risks in parliament,” said Derrick.
The future of the UK will be decided in the upcoming months. So far May has managed to hold onto her leadership, and there has yet to be a direct leadership challenge from within the party. The BBC noted that while the pound had a “wobble after Boris Johnson’s announcement” the moves were not big enough to signal a change in leadership. With May still at the helm, business leaders will hold out for a soft exit, and this will be reflected in the value of the sterling.
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