LONDON (Reuters) – Sterling rallied yesterday as traders bet that the resignation of Britain’s Brexit minister would not endanger the prime minister and instead focused on the government’s newly-announced plan that markets believe makes a “soft Brexit” more likely.
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David Davis resigned overnight because he was not willing to be “a reluctant conscript” to Prime Minister Theresa May’s hard-won Brexit agreement. That plan would see Britain and the European Union retain close trade ties but according to Mr Davis would hand too much power to the EU.
Mr Davis said yesterday that he would not encourage a challenge to Ms May’s leadership, fuelling sterling’s rally as investors speculated that the exit from the cabinet of a chief opponent to a softer Brexit would make it easier for the prime minister to negotiate with Brussels.
The British currency gained as much as half a percent to $1.3363, its best level since June 14, with most of the rise following Mr Davis’ comments that downplayed the risk to Ms May posed by his departure.
Sterling also strengthened against the euro, up 0.3 percent on the day at 88.17 pence per euro.
“She’s survived resignations before she can survive again,” said Jordan Rochester, currencies strategist at Nomura, adding that the material change for the pound would be if Ms May’s government looked at risk of collapsing.
Mr Davis’ resignation has underscored Ms May’s limited ability to impose cabinet discipline around a softer Brexit, but analysts said that was less important than the prime minister’s success in getting broad agreement for her plan – announced on Friday – for life after the EU.
Under that agreement Britain will retain a close trading relationship with the EU, making the sort of arrangement business leaders have called for in recent weeks more likely.
“It’s a softer Brexit and it’s a plan. A plan is better than no plan. The market is extrapolating that the EU will get more concessions out of the UK,” bringing the two sides towards something like a customs union favoured by markets, Mr Rochester said.
Broad-based dollar weakness also supported the pound’s bounce, while economic data due out this week could raise expectations of a Bank of England interest rate rise in August if they point to growing economic momentum in the second quarter.
Sterling has climbed 2.3 percent since it hit a 7-1/2 month low in late June, boosted by improving economic sentiment and signs that Ms May had faced down the so-called hard Brexiteers in her cabinet.
“News that Brexiteer David Davis has resigned looks welcome news to those looking for a soft Brexit. The question will be what further backlash (leadership attack) Ms May now faces from the right wing of the party,” said ING analysts in a note.