The pound enjoyed its third consecutive session of gains on Thursday, accelerating in response to an improving market mood.
The 31 October Brexit deadline is fast approaching, but we aren’t likely to see any progress in talks until the new Conservative party leader is announced on 23 July.
While we started out with a pool of candidates, Former Foreign Secretary Boris Johnson and current Foreign Secretary Jeremy Hunt are now going head-to-head to become the next leader of the Conservative Party and the UK’s Prime Minister.
In the fifth round of voting Johnson stormed ahead with 160 votes, while Hunt secured 77 – putting him only two votes ahead of Michael Gove, the last candidate to be eliminated from the race.
Who’s the current favourite?
Sterling has been under pressure since current Prime Minster Theresa May announced her resignation as leader of the Conservative party on 7 June.
Boris Johnson emerged as the clear front-runner from the first round of voting. As Johnson has stated that he is committed to the UK leaving the EU on 31 October with or without a deal, the pound dropped to multi-month lows against the euro and US dollar.
Markets had been holding on to the possibility of a softer Brexit, or even Article 50 being revoked, but such outcomes have become increasingly unlikely as Boris Johnson extended his lead in each of the five votes among Conservative MPs.
With a secure backing of Conservative MPs, Johnson is the current favourite to win the leadership contest.
While Johnson has stated that the chance of a no-deal Brexit is a ‘million to one’ it did little to calm nervous investors that the UK is not on course to crash out of the EU. The former Foreign Secretary has stated that he wished to negotiate a fresh Brexit withdrawal agreement that includes replacing the Irish backstop with alternative arrangements.
The clock is ticking and both candidates would have a very limited time to head back to Brussels and attempt to renegotiate a new deal. Theresa May’s deal took 20 months of negotiation.
The Bloomberg survey of analysts predicted that the hard-line Brexiteer becoming the next leader was the most likely scenario, with 70% probability. Economists have predicted that in the case of Johnson being the victor the pound could slide by more than 2%.
It’s not only Boris Johnson that would be willing to take the UK out of the EU without a deal. Jeremy Hunt has expressed that he would back a no-deal Brexit with a ‘heavy heart’ if necessary, despite describing it as ‘political suicide’.
Markets believe Hunt is likely to take a softer approach to Brexit, and ex-Conservative leader William Hague offered his support by stating that Hunt had ‘the best chance of avoiding calamity over Brexit.’ So, it would be a pound-positive scenario if he is able to beat current favourite Boris Johnson.
The Foreign Secretary has also claimed that he won assurances from Germany’s Angela Merkel to ‘look at’ his plans to implement a new Brexit withdrawal agreement if he becomes the next Prime Minister. He claimed he was confident a new agreement could be drawn up by September.
At the beginning of July, Jeremy Hunt also said he would decide by the end of September whether there is a ‘realistic chance’ of reaching a deal with Brussels.
While both leadership candidates have expressed they would be willing to pursue a no-deal Brexit, Jeremy Hunt becoming the next Prime Minister remains the best-case scenario for the pound in the short term.
A softer Brexit would lift Sterling to around $1.30 against the US dollar, while the pairing could slide to around $1.24 if Johnson takes the reigns.
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