The markets do not generally reward political instability, but, thanks to Brexit, the United Kingdom is a special case these days.
So it was that, on Tuesday, the government’s loss of a working parliamentary majority resulted in the pound’s recovery from depths not seen for a couple years.
Prime Minister Boris Johnson was speaking to Parliament when a lawmaker from his Conservative Party, Phillip Lee, strolled across the chamber and sat down with the Liberal Democrats. The government previously had a working majority of one—and that’s counting the tentative support of Northern Ireland’s Democratic Unionist Party.
Lee’s defection wasn’t even the worst blow to Johnson’s authority on Tuesday. Later, Parliament voted 328 to 301 to allow the proposal of new legislation forcing the government to request a Brexit extension until the end of January, unless lawmakers agree a Brexit deal or vote for a no-deal Brexit by October 19.
Twenty-one Conservative members of Parliament—including former Chancellor Philip Hammond—voted against the government, forcing Johnson to make good on his threat to expel them from the party. That means his majority is now firmly in the negative.
The historic events of Tuesday saw sterling rise 0.16% against the dollar, taking it back above the $1.20 level. Why? Because they make a no-deal Brexit at the end of October a little bit less likely. Johnson claims to want to leave the EU with a deal, but Brussels says he has made no effort to realize this outcome, and most observers believe he really wants a no-deal Brexit.
“Johnson’s defeat gave a breather to the pound markets,” said London Capital Group senior market analyst Ipek Ozkardeskaya in a note. However, she noted, sterling could get “another shake” if there’s an election next month.
Johnson has maintained that he does not want an election, but will call one if the new legislation forces him to request a Brexit extension. He was elected to the Conservative leadership on a platform of leaving on October 31 come what may, and, if he were to emerge from a mid-October election with a fresh majority, he could theoretically then use that consolidated power to unravel the legislation and make a no-deal Brexit a reality.
There are two problems with Johnson’s potential election gambit, though. One obvious issue is that he might not win—polling shows the Conservatives are hemorrhaging Remainer support to the Liberal Democrats, and hard-Brexiteer support to Nigel Farage’s Brexit Party.
Perhaps more importantly, though, Johnson may not be able to call the election at all. By law, a snap election can only be called with the backing of two-thirds of parliamentarians, and the opposition parties are refusing to play ball until the anti-no-deal legislation has been set in stone.
At the moment, Labour’s Jeremy Corbyn is in a stronger position than he has enjoyed in quite a while. Johnson’s decision to suspend Parliament for five weeks (from next Tuesday) managed to unify a fractured opposition in outrage and Corbyn, as the figurehead of the resistance, has taken on the mantle of democracy’s defender.
Remarkably—considering he’s a banker-baiting, old-school Marxist with big plans for nationalization and tax hikes—Corbyn also has the likes of Citibank and Deutsche Bank behind him. “Is Corbyn as bad as no-deal? Perhaps no longer,” said Citi’s Christian Schulz.
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