The British pound is expected to face a tough time this week after ministers from British Prime minister Theresa May’s cabinet suddenly quit their posts, which has raised speculation that a leadership challenge could come as early as this week.
Firstly, it was Brexit Secretary David Davis who quit the government over the state of Brexit negotiations which was followed by the resignation of foreign Secretary Boris Johnson who claimed that the British public were being sold out with regards to Brexit.
It is no secret that Johnson has had his eye on the top job for a long time and is seen as one of the candidates to challenge Prime minister May but some analysts say the move could backfire.
The reason is a leadership challenge may open up a window of opportunity for the Labor government to take power which have their own version of Brexit which would send the UK economy into a tailspin and this would be devastating for the pound.
“The resignation of Johnson will add to market fears of a leadership challenge, in the process risking further U.K. political paralysis,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce.
“Events of the last 24 hours suggest that more extreme Brexit conclusions are on the rise, suggesting sterling volatility should move appreciably higher.” He added.
The political instability has also cast into doubt the bank of England’s ability to lift interest rates next month and the consensus is if there is a leadership challenge a rate hike will most definitely be off the table which will also be bad news for the pound sterling.