Update on UK political developments (9 July)

I did not expect Davis or Johnson to resign.

However, it still appears to me that May had a win on Friday when her cabinet signed up to the plan.

The plan appears to be the only workable compromise.

Without a compromise, it is either a hard Brexit, or a no Brexit.  The paths to either are very damaging for confidence and cohesion in the UK public and economy.  It is not clear that these paths would be other than dead ends.  This reality has prevented these paths from being taken so far, and I expect will ensure that the UK will keep moving towards a workable compromise.

Davis and Johnson appeared to have conceded to the cabinet view on Friday, and then backtracked when they read the tea leaves from their supporters in public and parliament.  This appears to make them look weak.

May has received support from the other prominent Eurosceptic Michael Gove, who is reported to have urged the party to support the plan.  May has been able to quickly replace Davis with Raab as Brexit Secretary, another Eurosceptic, which suggests she has been able to split the Eurosceptics.

I read and hear a lot of criticism of May’s leadership.  But she is still here, she has the only credible plan, she has been battling between idealists that fail to offer an alternative compromise.  The delays in coming to this plan are only natural when you have to hold this group of people together.

The EU is not negotiating since they cannot be sure the UK has a plan it can stick to.  Some EU players are still holding out for a collapse in government that leads to no Brexit, so they make statements designed to stir the pot.  Only when the UK government appears to have a plan they are serious and committed to will it force the EU negotiators to play ball.

Could Johnson now launch a leadership challenge?  To do so would be to ask his party to take ownership of a hard Brexit.  He has no workable version of a less soft Brexit.  As such there does not appear to be any alternative to May’s leadership.

If May gets through this period, appoints a new foreign secretary, it may appear that she has won and pushed through this difficult period and diminished the power of the Eurosceptics.  In which case the EU may feel they have to give her new plan a fair hearing.

Johnson appears to me to be a political opportunist that has tied himself to Brexit, and now has no choice but to keep pushing for a hard Brexit otherwise he would have no support base.

Johnson could decide to make a challenge if only to demonstrate his bravado.  He has the potential to be disruptive and unsettle a skittish market.  I suspect this would be a failure, and in the end, might be viewed as a buying opportunity for the GBP.

If Johnson could recruit Gove to his side, that might be viewed as critically damaging May’s leadership and deal the GBP a big blow.  But would this really be the group of people that could lead the country? Gove would have made another backflip. The risk is a disastrous government, crashing out of Brexit, new elections, the public and government swinging back and forth between hard and no Brexit, and economic melt-down.

As an Australian living in the US, taking views on UK politics, I do so cautiously and a recognition that I don’t fully appreciate the nuances.  I decided to dabble in a long GBP position on Monday.  I am watching this closely, and accept there is a risk that I have been caught out by renewed turmoil that could get worse before it gets better.

Perhaps I was naive to expect the Tory party to hold together behind May.  It still seems like the most sensible path for the party to take.  At this stage, I am holding on to the position to see if May can prevail. Again.

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Greg Gibbs,
Founder, Analyst and PM
Amplifying Global FX Capital Pty Ltd