UK PM May to contest leadership challenge

It’s been a long time coming, but this morning we finally received official confirmation that the 48 letters required to trigger a Tory leadership challenge have been submitted. The vote amongst Conservative MPs is expected to take place this evening with an outcome likely to be known around 9PM. Despite this development the pound is actually edging higher on the day as it looks to recover from the sizable declines so far this week. UK stocks overall are also moving higher with the FTSE 100 adding 75 points and trading up by more than 1%.  

Tory rebels finally make their move

The writing has been on the wall for quite some time as far as a leadership challenge is concerned with a series of setbacks for the PM causing dissenting voices in the government to grow ever louder. The final straw came on Monday when May pulled a key vote on her Brexit deal at the 11th hour and this has seen the threshold for a vote of no confidence met after 15% of Tory MPs submitted letters. However, it should be pointed out that more than 50% of these will need to vote against the PM later to remove her from the role and this is quite a jump.

Even though her job is on the line, the vote could in fact end up delivering some positive news, not just for PM May, but also for the pound. Given the time it has taken to reach this point it is pretty clear that there’s not overwhelming support to oust the PM, and should May survive this contest by a sizable margin then it will likely serve to embolden her position.

Better the Devil you know?

There is little doubt that support amongst Tory MPs for May’s current Brexit deal is weak to say the least, but one big factor in her favour is that two of the most plausible alternatives are deemed far less attractive. Firstly, if May is ousted she will almost certainly be replaced by someone who will push for a harder Brexit and this would further alienate “Remainers” within the party. Secondly, replacing PM May would increase the chances of a vote of no confidence in the government, opening the door for a possible general election and the prospect of Labour leader Jeremy Corbyn as the next PM. If the first of these scenarios could be described as undesirable, the second would be vehemently opposed by the Tories and as such they may think very carefully before voting against the PM this evening.

As such Theresa May is actually odds on with bookmakers to survive tonight’s vote and if she does by a sizable margin it would quash the momentum against her and could well boost the pound. Given all the noise surrounding the latest developments it is worthwhile taking a step back and looking at what has actually happened in the markets. Whilst the Pound has dropped to its lowest level in 20 months against the Dollar this morning and dipped below the $1.25 level the selling has been pretty orderly and far from the panic stations seen in previous declines.

Sterling has lost between 1-2% against the Dollar, Euro and Yen so far this week and given the level of negative developments this is a relatively muted depreciation. A move back to the post-referendum lows around the $1.20 mark, or even lower, can’t be ruled out if May is ousted but this isn’t the base-case scenario. It appears that Theresa May has more than a fair chance of winning the leadership contest and if she does by a significant margin it would serve to embolden her position and could well lead to a relief rally in the pound.