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British Pound: Odds Slashed on General Election in 2018, Analysts Views on the Outlook vs. the Euro and US Dollar

- Raab new Brexit secretary

- Odds of new election in 2018 now at 6/4

- "Don't extrapolate UK political risks from GBP's price action today" - ING

- 60% of semi-soft Brexit - Berenberg

Raab is new Brexit minister

Above: New Secretary of State for Exiting the European Union, Dominic Raab. Image © Gov.uk

Odds have been slashed by bookies that a General Election will be called in 2018 following a slew of ministerial resignations over the course of the past 24 hours.

Theresa May's government has plunged into the worst crisis of its tenure with the resignation of Secretary of State for Exiting the European Union David Davis citing fundamental disagreements with the government's stated Brexit policy.

Davis was followed by deputy, Steve Baker, and another Brexit minister Suella Braverman.

Davis has since been replaced by Dominic Raab, widely considered to be an up-and-coming member of the party. Raab has been described as a "passionate" Brexiteer and the appointment confirms May intends to stick with a strategy of maintaining a balance of Brexiteers and Remainders in her cabinet which should promote the sense that party unity could yet be achieved.

Betting markets have nevertheless slashed odds from 6/1 yesterday, into just 6/4 today, that a general election will be called before 2018 is out according to Oddschecker, the betting market probabilities collator.

The general public is meanwhile seen backing an election being called this year, with a whopping 90% of bets being placed on the election taking place before 2019.

“Just when Theresa May finally thought that she had made a breakthrough in her Brexit negotiations, this resignation late on Sunday night could spell a turbulent week for the PM," says Oddschecker spokesperson George Elek. “Punters are sensing that a coup could be on the horizon, and it could be yet another walk to the polling station for UK voters.”

The Pound has bounced up and down in the wake of the news, first opening higher on the view that May had gone 'soft' on Brexit following her ministerial conference held at Chequers at the end of the previous week that saw an apparent unity break out over the government's Brexit strategy.

However, it fell on news of Davis' resignation, apparently disliking the uncertainty his move posed. But, at mid-morning we are seeing Sterling holding decent gains, apparently betting that the only way forward is a soft Brexit:

The Pound-to-Euro exchange rate is 0.21% higher on the day at 1.1337 while the Pound-to-Dollar exchange rate is 0.40% higher at 1.3345. Indeed, Sterling is one of the best performing global majors at the start of the week.

However, analyst Viraj Patel with ING Bank N.V. cautions about reading too much into the Pound's moves as an interpretation of the political landscape:

"Don't extrapolate UK political risks from GBP's price action today. GBP is not 'higher' because of 'lower' political risks, it's higher because of a weak Dollar, positive global risk environment. Equally GBP didn't move lower because UK political risks aren't material yet."

"Uncertainty may keep a lid on GBP for now, but softer Brexit hopes means risks are tilted towards the upside," adds the analyst.

Initial reactions to the government's 'unified approach' or 'third way' proposals on the future trading relationship between the UK and EU was that it presented a move towards a 'soft Brexit', which is widely-held as being positive for Sterling.

The proposed strategy was to negotiate a free trade zone in goods with the EU, which would require the UK to stick to EU rules for goods and collect tariffs on the EU’s behalf for goods that pass through the UK heading for the EU.

The thinking is this strategy would allow the Irish border problem to be settled while keeping the UK single-market intact.

"Whichever way you shuffle the deck, the hand remains the same," says Kallum Pickering, an economist with Berenberg Bank. "In theory, the resignation of the minister in charge of the UK’s Brexit strategy should have major implications for the Brexit outcome. In reality, however, Davis had become increasingly pushed towards the outer rim of the UK’s relevant decision makers in recent months."

Berenberg say there is now a 60% chance of a semi-soft Brexit

"Last year, the EU27 had a £95bn goods surplus with the UK. As long as Irish PM Leo Varadkar gives the nod, the rest of EU27 can probably agree to an augmented version of PM May’s proposed free trade area in goods, in our view. If the UK insists on ending free movement of people, we do not see any realistic prospect of the EU extending such a deal into services trade," adds Pickering.

In Berenberg's base-case for a semi-soft Brexit, UK potential growth would fall to 1.5-1.7% from +2.0% inside the EU.

Derek Halpenny, European Head of Global Markets Research at MUFG, says the pound is clearly vulnerable to the downside if this resignation turns into a domestic political crisis.

"Single-handedly, Boris Johnson could perhaps do that but the limited sell-off of the pound on this news suggests market participants believe this resignation will be an isolated incident. But don’t expect any surge for the pound if that if that proves to be the case. We have yet to hear how Brussels will respond to this deal, which appears to contain plenty of “cheery-picking” of Single Market access," says Halpenny.

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