UK Political Climate Deteriorates

...As May Suffers Two Key Resignations On New Brexit Plan

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With US and EU politics having dominated the landscape over most of the year so far, attention is now shifting back to the UK where the government’s Brexit battle is in full swing. After much anticipation, UK PM Theresa May last week unveiled her new plan for Brexit. The new agreement affirms that the UK will abide by a “common rulebook for all goods”, which essentially refers to the single market for goods/agriculture. The government has also said it will push for a “facilitated customs arrangement” where the country could impose different tariffs to the EU which would allow it to establish trade deals outside of the EU. However, the big question now is whether the EU will accept the deal.

May Risks Vote of No-Confidence

The proposal was not received well by her own camp and both Brexit secretary David Davis and Foreign Secretary Boris Johnson. Such high-level resignations from two of her key ministers has thrown the question of May’s strength as a leader into question once again, fuelling speculation of a leadership challenge.  While Davis and Johnson’s resignations are both critical, there has been speculation for sometime that they were going to happen. However, the real focus now will be on pro-Brexit MP Jacob Rees Mogg and his cohorts who, according to reports, are looking to gather enough signatures to trigger a vote of no confidence and establish a leadership challenge.

To trigger such a move, 48 signatures are required and according to the UK media, around 40 are already secured with Jacob Rees Mogg also claiming that around 100 Tory MPs stand ready to vote down the PM’s new Brexit deal if she tries to push it through parliament. Referring to the dal penned in Chequers Rees Mogg highlighted on twitter that a recent snap poll shows 60% of Conservative party members think the agreement is a “bad deal” and that “no deal is better than a bad deal”.

Who Could Content With May?

In terms of who is likely to take over if such a challenge does materialise, current odds favour Michael Gove with bookmakers PaddyPower giving 4/1 odds, Home Secretary Sajid Javid given 6/1 odds and Jacob Rees Mogg given 7/1 odds.

Despite current speculation, if May does suffer a vote of no confidence it is unlikely that a second election will be called as two thirds of tory MP’s would need to vote in favour of it. While rebels within the party might be in favour of voting against the PM’s Brexit plan and and voting no confidence in their leader, they are unlikely to risk a new election and the prospect of losing power.

There has also been speculation regarding the likelihood of a second referendum on Brexit. However, once again this looks highly unlikely, firstly because there is no apparent “leader” for such action.  Bookmaker PaddyPower currently offer 5/1 odds on a second referendum before the Brexit deadline of April 2019.

What happens if the EU shoots down the deal?

If May is able to retain power within her own party and remain leader of government, the key focus will be on how the UK’s position will evolve. The “facilitated customs arrangement” suggests on Friday shows that the UK will potentially end up staying in the customs union, as Friday’s proposal was a sort of halfway house solution. If this is the case, the UK may end up diluting its boundaries on budget payment, ECJ and migration as these are the issues which are most politically contentious within the UK.  If the UK is willing to offer some ground in these areas then the EU might go for it and some member countries such as Germany and France who trade heavily within the UK would be in favour of remaining in a customs union.

Technical Perspective

gbp technical perspective

After posting a double top earlier in the year, GBPUSD has been on a sharp decline which has taken price back below the .13660- 1.37 support, which now acts as resistance. The next key level to watch to the downside will be the 1.2899 level which is the 50% retracement from 2016 lows. To the topside the next resistance is the 1.3431 level

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