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How does a leadership challenge to a UK Prime Minister work?

How does a leadership challenge to a UK Prime Minister work?

Justin McQueen, Analyst

GBPUSD Analysis and Talking Points:

  • GBP Could Sink to 2018 Lows on Leadership Challenge
  • Centrist MP Joins Tory Rebels in No-Confidence Letter

See our quarterly GBP forecast to learn what will drive prices through mid-year!

As Brexit discussions enter its most difficult phase yet, PM May once again finds herself under intense scrutiny at the top of a fractured government that is unable to unite over her plans to leave the European Union. Talk surrounding a leadership challenge has been on the rise following reports that an unnamed centrist Tory MP has sent a letter of no-confidence, while Tory rebels have become increasingly critical after Brexit negotiations reached an impasse with the UK and EU failing to agree on a workable solution over the Irish border issue.

As such, the increased likelihood of a no-confidence vote in PM May has kept the Pound on the backfoot and could continue to do so with a move towards the 2018 lows (1.2660) possible, in the event that a vote is carried out. As it stands, odds from UK betting names imply that there is a 50% chance of a no-confidence vote before the year-end.

What needs to happen for there to be a leadership contest?

For a leadership challenge to be triggered, 15% (48 MPs) of MPs in PM May’s party would need to write a letter to the Chairman of the party’s, Sir Graham Brady, which is called the 1922 committee.Once the threshold is reached, the chairman will announce the start of the contest and invite nominations. Recent UK press reports suggest that roughly 40 letters have already been sent privately.

What will happen during a no confidence vote?

If a no confidence vote is called, all serving Conservative MPs will be able to cast a vote for/against PM May. For Theresa May to be ousted, a simple majority of 159MPs would be needed, whereby May would also be barred from standing in the leadership contest that follows. A victory for PM May in a confidence vote would allow her to remain in office, however, there could be an increased risk that Theresa May decides to step down if there were a significant number of no-confidence votes in light of her weakened position.

In the event that Theresa May is ousted, a Tory leadership race would take place with MPs given the power to shortlist the final two candidates.

Most likely Next Conservative Leader, according to UK bookmakers

  • Sajid Javid (5/1)
  • Boris Johnson (6/1)
  • Jeremy Hunt (7/1)

How quickly can a no confidence vote take place?

In the last no confidence vote against a sitting Conservative leader in 2003, the chairman of the 1922 committee announced he had received enough letters to trigger a vote with the vote held the next day.

Impact on GBP from a Leadership Challenge

Growing concerns that Tory rebels could topple Theresa May saw GBPUSD shed as much as 0.9% on October 22nd, hitting lows of 1.2957. A leadership challenge taking place could see GBPUSD move back to its 2018 lows (1.2660) amid the increased domestic political uncertainty, while also providing upside risks for EURGBP towards 0.90.

BREXIT RELATED ANALYSIS

GBP TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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