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May to fight a leadership challenge ahead of EU summit

london | EconAlerts

The EU28 leaders will gather in Brussels on Thursday, in the context of the two-day summit, to discuss Brexit after the UK Prime Minister, Theresa May, decided in the last minute to postpone a parliamentary vote on the withdrawal agreement to avoid a dramatic defeat. But as May tours European capitals in a bid to persuade her European counterparts to improve her much-hated Brexit deal, she received an unexpected call to return home and face a no-confidence vote from her own Conservative party. If she wins the vote, her negotiating hand would be strengthened at the summit.

The delay of the Brexit vote in Parliament raised anger among Tory MPs and therefore pulled the trigger for a no-confidence vote against the British leader, with the ballot scheduled for today between 1700 GMT and 1900 GMT. The senior Conservative Party member who is responsible to run the leadership contest announced earlier today that at least 48 Tory parliamentary members have sent a letter to express that they no longer have faith in May – enough to initiate a formal no-confidence vote. But May will need at least 158 out of 315 Tory lawmakers on her side to win the challenge today and avoid a crash in her political career, which according to rumours she is not far away from achieving it. Yet, given that lawmakers will vote anonymously, things may turn around for May.

In case she succeeds and holds on to her role, winning immunity for at least the next 12 months, she would fly back to Brussels to renegotiate the Brexit plan agreed with the EU and specifically, the part related to the Irish backstop, which is the main reason why a significant number of her Conservative colleagues are against it – May agreed with the EU to keep the whole of the UK in a custom union if a solution to maintaining borderless trade on the Irish border is not found by the end of the transition period in 2020.

Although May is arguing that it would not be in the EU’s interest to keep the UK trapped in a customs union indefinitely, Eurosceptic Tories, as well as many opposition MPs, are not convinced that this could be temporary, and fear a damage to the UK integrity. The British PM set a deadline on January 21 to secure another version of the agreement that would please her party. However, this could prove a hard battle with the EU given that the bloc has already made it clear that renegotiation is not an option.

Consequently, a no-deal Brexit may potentially occur on March 29, while chances for a delay of the Article 50 are also rising, especially if May is ousted. A new leader would not take the role before January, which could prove too late to restart negotiations, leaving the door open for a delay or no exit at all (Hopes that Brexit could be cancelled were boosted after the European Court of Justice ruled this week that the UK could unilaterally withdraw Article 50).  Hence at this stage it does not really make sense to change a leader.

With early indications suggesting that May will comfortably win the vote of no-confidence, the UK prime minister plans to travel to Brussels on December 13 to secure changes to the current deal. But with the EU so far offering only cosmetic changes to the details around the Irish backstop issue, her future could once again be called into question if the updated deal gets voted down by Parliament.

Turning to FX markets, the Brexit noise helped EUR/GBP to break the almost one-month range and spike to a three-month high of 0.9087 last week. A positive vote outcome for May, could support the pound and send the pair down to the 50-period simple moving average (SMA) currently at 0.8949 and near the upper bound of the recent range (0.8944). Even lower, the price could find an obstacle around 0.8887, while if this fails to halt downside movements too, the focus would shift to 0.8850, where the 200-period SMA is standing at the moment.

On the flip side, if May loses the battle, the pair may jump back above 0.90 on the back of the political chaos that would ensue to retest the previous peaks at 0.9070 and 0.9087. Higher, resistance could run towards the 0.91 and 0.92 marks.


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This information is not considered as investment advice or investment recommendation but instead a marketing communication. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Source: XM

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