May's Leadership Challenge Playbook

GBP markets turn attention away from Brexit and onto PM Theresa May's popularity as the 48 letters required to trigger a vote of confidence on her leadership have been reached. The confidence vote shall take place around 6 pm GMT/London and is widely expected to result into a victory for PM May, shielding her from any more leadership challenges for at least 12 months. More below. Risk assets have rebounded after a significantly choppy session, partly due to more positive remarks from the US and China with regards to trade negotiations. In 24 hours from now, attention shifts to EUR trading as the ECB unveils its post-QE program and Draghi focuses on reinvesting QE proceeds. 

Cable has rebounded to 1.26 after having sunk more than a cent from the highs to 1.2490s for the first time in 20 months. It was the second day of heavy selling after the Brexit bill was pulled. GBP's bounce emerges ahead of tonight's confidence vote, which is widely anticipated to guarantee Theresa May staying for at least another year. Whether this will triggers a fresh dead-cat bounce in GBP until she goes back to Brussels tomorrow for fresh negotiations remains unknown. At the same time, it may not get her any closer to an EU-Brexit deal with the majority of parliamentarians still opposed.

If PM May loses the vote, it could be the start of a civil war within the Conservative party. Several MPs could challenge for the leadership in a contest that will eliminate them one-by-one in a vote of MPs until only two are remaining. Then the vote would go towards the broader members. A nightmare scenario would be a two deeply opposing candidates and a narrow vote.

With no simple path to any kind of clarity or stability, there is no scope for a rebound in the pound and the constant selling pressure is unlikely to abate. There's a real risk of scenario similar to October 2016 when pound selling became disorderly. Ashraf tells me he is increasingly certain we have seen the lows at $1.20 for cable. The next step is to worry about May's negotiations progress with the EU, the likelihood of a preliminary agreement in Westminster before setting the next date for a vote in Parliament.