May had some major blows this week
Boris's resignation does not trigger an immediate push for a confidence vote
Theresa May has survived many setbacks and several times she has been called “dead woman walking”. She had some major blows this week and Borexit has brought more turmoil for her Brexit plans- for now. Her leadership is utterly under question and odds of another election taking place are high as well. The indication of this can easily be seen by looking at the implied volatility of an interest rate hike for Sterling by the Bank of England. It dropped over ten percent yesterday as traders now do not see a strong case for the Bank to increase the interest rate when they meet next month.
The same theme is pretty much evident when you look at the bearish bets on sterling by institutional clients. They are touching the sky once again and giving a clear sign that investors aren’t supporting the currency. The Sterling softness against the euro pushed the price above 0.89, a level not seen since March this year. Although, it is important to mention that traders have been quick in shaving the profits (the current price is now 0.8871).
The reason behind this is that Boris's resignation does not trigger an immediate push for a confidence vote against May. She has already survived one and another vote confidence cannot be repeated for another 12 months. Having said this, she lacks the parliament majority and she needs her party's support in this task. Her team has already submitted letters for a vote of confidence in May. This is going to keep the sterling trading very choppy.
The FTSE 100 would be the major focus among investors. Lower sterling would push the FTSE 100 higher. If we head towards another election, it would most probably mean another referendum on Brexit. Theresa May has ruled out the possibility of such event under her government, perhaps she is not confident enough that same outcome can be achieved again. Theresa May never wanted to adopt the softer Brexit approach and the resignations of Brexit Secretary and Foreign Minister is mainly due to this reason- prominent members want to have a full breakout.
In terms of technical analysis, the balance of power shows that the bulls are lossing control. However, if the price stays above the 100 & 200-day moving averages, the bias remains to the upside.