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Pound Tumbles As Theresa May Faces Leadership Challenge Over Brexit Chaos

It might be a modest exaggeration it to say that Theresa May’s position as Prime Minister is doomed, but that is the general direction as the newsflow for the British PM remains overwhelmingly bad. Scandals aside, May seems to be falling into the growing gulf between Conservative MPs who are pushing more strongly for a “hard” Brexit as negotiations with the EU founder and those who are increasingly alarmed at the prospect, making them more desperate to ensure a softer Brexit.

After Theresa May delivered her “disastrous” conference speech in Manchester on 5 October 2017, there was press speculation that between 30-35 MPs in her party were prepared to sign a letter supporting a no confidence vote in the Prime Minister. Since then, we’ve seen the resignation of two of her ministers due to different scandals, continued party infighting and lack of progress on Brexit negotiations. And, according to articles in the weekend press, this number of party rebels has risen to forty, leaving her eight short of facing a potential leadership challenge if she lost a no confidence vote. From Sky News:

Forty Conservative MPs are reportedly prepared to sign a letter of no confidence in Theresa May, amid claims she is being held "hostage" by two members of her top team. The disclosure in the Sunday Times will pile the pressure on the Prime Minister as she enters a crucial period in the Brexit negotiations and comes as she attempts to steady the ship following the resignations of two Cabinet ministers. The total is eight short of the number needed to trigger a leadership contest under Conservative Party rules. There was a mixed reaction to the news from prominent Tory MPs. "I have not heard this", one told Sky News, while another said the 40 figure "doesn't sound right". But others said it was "around that number" and it "probably is (accurate)".

A report in the Independent quoted a “senior Tory MP” who told the newspaper.

“Patience is wearing very thin and in some cases, it has snapped.”

Compounding May’s woes, a “secret” letter from two of her most senior (and controversial) ministers seeming to instruct her on how to pursue a “hard” Brexit was published in the press. The letter is titled “EU Exit – Next Steps” and ironically marked “For your and Gavin’s eyes only”, which refers to May’s Chief of Staff, Gavin Barwell. The letter is being characterised as a “soft coup” attempt by the ministers, whose falling out after the Brexit referendum paved the way for May to become prime minister. According to The Independent.

A secret letter from Boris Johnson and Michael Gove giving Theresa May instructions on how to orchestrate a hard Brexit has emerged. The memo demands the Prime Minister, who looks increasingly fragile following the departure of two of her Cabinet ministers in as many weeks, "underline her resolve" for leaving the European Union, according to The Mail on Sunday. The letter also sets out a date for transition arrangements between the EU and UK to end of 30 June 2021, the newspaper said. Mr Johnson and Mr Gove are also said to have urged the Prime Minister to ensure members of her top team fall behind their Brexit plans by "clarifying their minds" and called for them to "internalise the logic".

The leaked letter appears to make a thinly veiled attack on Chancellor Philip Hammond, who backed remain and wants a softer Brexit, for lacking the "sufficient energy" in preparing to the UK's future outside the bloc. A senior Government source told the Mail the Foreign Secretary and Environment Secretary had conducted a "soft coup" and described Ms May as "their Downing Street hostage".

It states: "Your approach is governed by sensible pragmatism. That does not in any way dilute our ambition to be a fully independent self-governing country by the time of the next election. If we are to counter those who wish to frustrate that end, there are ways of underlining your resolve. We are profoundly worried that in some parts of Government the current preparations are not proceeding with anything like sufficient energy. We have heard it argued by some that we cannot start preparations on the basis of 'No Deal' because that would undermine our obligation of 'sincere co-operation' with the EU. If taken seriously, that would leave us over a barrel in 2021. We all want you to push your agenda forward with confidence and have your Government articulate the following..." The letter suggests both men have set aside their differences following last year's Tory leadership contest, when Mr Johnson dramatically ruled himself out of the race after Michael Gove’s shock entry into the contest.

Sensing an opportunity to capitalize on May’s increasingly weak position within her own party, the opposition Labour Party offered to work with the Prime Minster to achieve a softer Brexit. From Bloomberg.

The U.K. Labour Party accused Theresa May of lacking the support within her Conservative Party to deliver a Brexit that will protect jobs, offering her a cross-party deal that will only add to pressure on the embattled prime minister. Keir Starmer, the party’s Brexit spokesman, wrote to May on Monday telling her there was a “sensible majority” in Parliament to secure a two-year transition deal for after Brexit. That would allow Britain to stay inside the European Union’s single market and customs union after 2019 while it completes trade talks with the bloc. He said the opposition to such an arrangement came from Conservatives. “Over recent weeks, it has become increasingly clear that you alone do not have the authority to deliver a transitional deal with Europe and to take the necessary steps to protect jobs and the economy,” Starmer wrote in the letter, which was released by his office. May is unlikely to welcome Labour’s offer, which highlights the fragility of her position.

To make matters worse, the debate on Brexit legislation – a.k.a. the EU Withdrawal Bill – kicks off again in Parliament tomorrow. The debating process will be agonizingly slow, taking eight days to discuss hundreds of proposed amendments, many from May’s own party who are trying to maintain close links with the EU.

The threat to May’s leadership has trickled down through to the markets, and seen Sterling fall by as much as 1.0%, below 1.3070 against the dollar, in early trade, sliding the most in a week on concern May’s authority was at risk from a potential leadership challenge with only a fortnight before the government needs to show “sufficient progress” on Brexit.

According to Bloomberg, which cited to traders in London, leveraged accounts were aggressively selling the pound. The yield on 10-year U.K. government bonds fell 2bps to 1.32%. The FTSE 100 rose marginally as Sterling assets were re-priced. 

Aside from May suddenly offering a sweetened deal to the EU – and she must be tempted – we would be surprised if the number of Conservative MPs prepared to sign a declaration of no confidence isn’t closing in on the critical threshold of forty-eight by the end of the debate.