What the UK’s no-confidence vote means for the pound

After weeks of speculation, the day of reckoning has come. UK prime minister Boris Johnson faces a no-confidence vote later today, after at least 54 MPs submitted letters requesting his removal from office.

Conservative MPs will vote in a secret ballot between 6pm and 8pm tonight to decide if they still want Johnson to serve as PM.

How did we get here?

A confidence vote was triggered after at least 54 Conservative MPs (the minimum number required to meet the 15% threshold) wrote to Sir Graham Brady, chairman of the 1922 committee of Tory backbenchers, requesting that Johnson be removed from office.

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To stay in power, Johnson would need to win at least 50%-plus-one of MPs’ votes.

We’ll leave the politics to other commentators, but what does the vote on Johnson’s future mean for sterling?

Why has the pound moved higher?

The threat of the imminent removal of a leader might seem to be a bad thing for a country’s currency.

During the political upheaval that surrounded Theresa May’s efforts to push Brexit through, the pound swung violently, yet despite today’s vote, sterling has been trading higher against both the US dollar and the euro. So what’s going on?

Daniela Sabin Hathorn at spreadbetting group IG notes that today’s vote is very different to the vote against May, in that it won’t make a huge difference to the UK’s economic direction. “The positive momentum in sterling suggests that markets are not worried about the outcome of the vote… as the impact on the economic outlook is likely to be limited.”

Other analysts note that the pound’s move higher is nothing to do with the vote, and is much more the result of a weakening US dollar, as many central banks across the world embark on catch-up interest-rate rises to combat inflation.

What is the outlook?

Markets believe it’s unlikely that Johnson will lose, says Bloomberg: “Bookmakers are offering long odds on Johnson’s ouster, suggesting their belief that such a scenario is unlikely.”

If Johnson escapes eviction today, he cannot be challenged for another 12 months – in theory, at least. However, that doesn’t mean the rules could not be changed.

It’s also worth noting that while May survived her no confidence vote in 2018, she still stepped down less than a year later, so merely surviving the vote is no guarantee that Johnson will remain in power for the next election – or that the uncertainty will go away.

It is also worth noting that the pound had anyway been on a somewhat poorly trajectory and has recorded five consecutive months of losses due to Britain’s sluggish growth forecasts.

So the pound could see some further pain for reasons outside of the confidence vote. “The pound remains vulnerable in the short term given worsening growth prospects and a potential re-pricing of BoE rate expectations,” ING Bank Analysts told Reuters, adding that a fall below $1.25 could pave the way for further declines to $1.230-$1.235.