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Britain’s pound was in focus on Monday, first rallying after the resignation of U.K. Brexit Secretary David Davis, but then falling after Foreign Secretary Boris Johnson also quit.
While Davis’s comments on May being a good leader and his replacement with leave campaigner and former housing minister Dominic Raab was seen as supportive of the pound, Johnson’s resignation was perceived as another sign of the fragility of Prime Minister Theresa May’s government and thus negative. The move is seen raising the chances May will face a formal leadership challenge.
“Initially, the news of Mr. Davis’s departure caused a selloff in cable on fears of a euroskeptic revolt against the PM that could lead to a no-confidence vote and a snap election,” said Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management, in a note Monday.
“However, Mr. Davis noted that he would not stand to challenge PM May, and the market quickly realized that the exit of hard-line Brexiteers could actually strengthen Ms. May’s ‘soft-Brexit’ strategy.”
Softness in the U.S. dollar also allowed sterling to trade higher, market participants said, stressing that political risk in the U.K. was definitely present.
Davis on Sunday night stepped down from his post as head Brexit negotiator for the U.K. On Friday, Prime Minister Theresa May had appeared to unite warring factions of her cabinet behind a new Brexit plan, which calls for a U.K.-EU free-trade area for goods but British autonomy over regulation for many services.
The pound fell to $1.3267 from $1.3287 late Monday in New York, having earlier touched $1.3363, its highest level in about two weeks, according to FactSet.
Similarly, the euro-sterling cross spent much of the day in the red, before the pound weakened against the shared eurozone. The euro last bought £0.8857, up 0.2%.
Meanwhile, the U.S. dollar lost ground against its main rivals Monday.
The ICE U.S. Dollar index which measures the buck against six other currencies, slipped on Monday, albeit reclaiming some of its lost ground after the pound’s reversal. The gauge, which had already fallen on Friday, was last little changed in negative territory at 94.061.
On Friday, as investors assessed a stronger-than-expected U.S. jobs report, as well as moves by the Trump administration and China to officially impose import tariffs. The index has weakened 0.6% in July, cutting its year-to-date gain to 2.1%.