Over the weekend, we had the somewhat shocking news that the chief Brexit for the UK, Lord David Frost, had tendered his resignation, effective immediately.
Naturally, that set off alarm bells that something might be wrong with the UK-EU talks. Frost had just finished an intensive session of talks with the EU’s representative, Sevcovic.
However, so far, the currencies haven’t been through too much of a shake-up. That’s because on Sunday we got a better picture of what happened, and what the implications are.
It seems that the resignation had little to do with the talks, and more to do with the internal situation in the UK government.
How long does Johnson have?
This latest event is the most recent addition to a series of uncomfortable situations for UK PM Johnson. It’s the first, however, to have international implications.
There have been rumors for over a month now that Johnson’s tenure in 10 Downing Street might be coming to an end. This comes as people are increasingly disapproving of measures taken to deal with the resurgence of Omicron.
In fact, it was over this disagreement that Frost is said to have resigned.
Lord Frost indicated that he had initially told the PM he would step down in January. However, due to the news leaking, he decided it was appropriate to leave straight away.
Jockeying for position
Foreign Secretary Liz Truss came in to replace Frost. This seems like a natural transition, except Truss was said to be one of the potential candidates to succeed Johnson should his unpopularity bring an end to the current government.
Other candidates include health minister Sajid Javid. Given that the reason Johnson is in trouble is the health measures, he didn’t seem as likely a candidate as Truss.
There has been some popular discontent over holiday parties that government officials threw in the middle of lockdowns. And Javid admitted to participating in at least one.
Sending the most likely successor, and favorite among rebellious backbenchers, to Brussels to get marred in a difficult situation might be a strategic political move. But that doesn’t mean it will reassure markets that the Johnson administration will stay in place.
In fact, the potential replacement might get investors to pull back due to uncertainty.
There isn’t much cause for optimism
On the political front, Johnson also suffered a blow last week when a solid Tory constituency shifted to Liberal Democrat in a by-election. Many analysts saw it as a test of Johnson’s coattails.
So, at least on a political basis, there isn’t much reason for investors to return to confidence.
Then there is the technical factor of the BOE’s actions last week. This means that there is room for a correction and pullback.
We are heading into a period of less volatility through the holidays in which Libor will be switched off. The political uncertainty likely only weighs on optimism, giving a more depressed outlook for the pound over the coming weeks.
