How the Tory leadership election could impact foreign exchange rates

21 Jun 2019

The result of a hotly contested leadership election could have a huge impact on sterling, interest rates and growth. Actually, two leadership elections…

The Tory leadership race appears to boil down to, “if not Boris, who?” The selectorate of up to 125,000 Tory members is thought to heavily favour the 'blond bombshell' (as well as being pro no-deal Brexit 3 to 1). But MPs deciding which two candidates are put to the membership will be mindful that his reputation in the country at large – which will be a huge factor in them keeping their own jobs – is more polarising. 
The No.10 hopefuls can be split into three broad groups - no-dealers, unity candidates and quiet remainers - each of which will likely lead to a slump for sterling, see the markets broadly unchanged, or potentially cause the pound to surge

How it plays out

  • 7 June: Theresa May officially resigned as party leader.
  • w/c 10 June: Deadline for nominations to the 1922 Committee - candidates must have eight MPs' support
  • From mid-June: televised hustings
  • 13 - 20 June: Final pair of candidates selected by a series of votes among Tory MPs.
  • Late June: Nationwide hustings for the final two, plus BBC and Sky News debates

  • July: Postal voting by Tory members.     
  • July: Parliament rises for summer recess, by when the 1922 hopes to have secured a new leader and PM.

Sterling sinks

The ‘no dealers’ insist 31 October is a hard deadline. If that means the UK leaves the EU without an agreement, so be it. A winner from this group will see a hit to sterling on no-deal fears.
“A Brexit no-dealer would likely hurt the pound, but there will still be time between them winning the leadership contest and the October deadline to avoid a no-deal,” says Investec FX trader Chris Brand. “A no-deal Brexit could potentially hurt the euro as well – but by nowhere near the same level.” It’s not just FX, of course. Make UK, which represents 20,000 UK manufacturers, said it would be “the height of economic lunacy to take the UK out of the EU with no deal in place”.

The no-dealers

Boris Johnson, former Foreign Secretary and London mayor

Current odds: 2/9


Power statement: “No one sensible would aim exclusively for a no-deal outcome. No one responsible would take no-deal off the table.” - 26 May.


First-round votes: 114

Second-round votes: 126

Third-round votes: 143

Fourth-round votes: 157

Fifth-round votes: 160

Andrea Leadsom, former Leader of the House of Commons

Current odds: N/A (voted out in first round)


Power statement: “To succeed in a negotiation you have to be prepared to walk away… With sensible measures… I do honestly believe that [‘managed’ no-deal] would be workable” - 25 May.


First-round votes: 11

Esther McVey, former work and pensions secretary

Current odds: N/A (voted out in first round)


Power statement: “This country needs a genuinely bold, new approach. So we must now leave the EU on October 31 with a clean break.” - 25 May.


First-round votes: 9

Dominic Raab, former Brexit secretary

Current odds: N/A (voted out in second round)


Power statement: “We must calmly demonstrate unflinching resolve to leave in October - at the latest. The country now feels… humiliated by Brussels.” - 25 May.


First-round votes: 27

Second-round votes: 30

Please note: All odds provided by (as of 21 June); 'MP backers' number provided by


Sterling steady

FX markets likely to move sideways with a winner from the group of ‘pro-dealers’.

The ‘compromise candidates’ will have noted the Tories’ worst-ever election performance and count on MPs seeing the risk of bleeding Remainer votes as much as Leaver ones. These candidates create less short-term risk – they explicitly want a deal, be it a hard Brexit or a soft Brexit – but the markets will be sceptical about their ability to do any better than Mrs May at creating a broad coalition in Parliament.

Unity candidates

Michael Gove, Environment Secretary

Current odds: N/A (voted out in fifth round)


Power statement: “I have got to grips with preparing for a no-deal, it is a possible... but it is ultimately better for all of us if we secure a deal and leave in an orderly way.” - 3 June.


First-round votes: 37

Second-round votes: 41

Third-round votes: 51

Fourth-round votes: 61

Fifth-round votes: 75

Mark Harper, former chief whip

Current odds: N/A (voted out in first round)


Power statement: “We've seen the same faces saying the same things for three years. I'm afraid they've sat around the Cabinet table sharing the responsibility with the PM." - 31 May.


First-round votes: 10

Jeremy Hunt, Foreign Secretary

Current odds: 4/1


Power statement: “I’ve been very clear that is it was a choice between ‘no deal’ and ‘no Brexit,’ I would choose ‘no deal’ but it’s not a choice I want to have.” - 31 May.


First-round votes: 43

Second-round votes: 46

Third-round votes: 54

Fourth-round votes: 59

Fifth-round votes: 77

Sajid Javid, Home Secretary

Current odds: N/A (voted out in fourth round)

Power statement: "We need to restore trust, bring unity and create new opportunities across the UK. First and foremost, we must deliver Brexit.” - 5 June.


First-round votes: 23

Second-round votes: 33

Third-round votes: 38

Fourth-round votes: 34

Please note: All odds provided by (as of 21 June); 'MP backers' number provided by

Sterling surges

The winner highly unlikely to come from the ‘must-dealers’ – but sterling might have a good day on hopes of a People’s Vote, or if Brexit is stopped.
The third group? ‘Quiet remainers’ who have been outspoken about the risks of no-deal and even hinted at backing a second referendum. (Several prominent grandees – such as Philip Hammond – have gone further and voiced that preference.) None openly advocate ‘no Brexit’, but the markets will price in some possibility of a longer stay in the EU and push the pound higher. 

Quiet remainers

Matt Hancock, Health Secretary

Current odds: N/A (withdrawn from contest on 14 June)


Power statement: “To the people who say ‘fuck business’, I say fuck ‘fuck business’.” “It is much easier to bring people together behind a proposal if you are straightforward in advance… A no-deal Brexit simply won't be allowed by Parliament.” - 25 May. 


First-round votes: 20

Plus ça change…?

Will a new PM be able to change anything, given the Parliamentary impasse? The Daily Telegraph’s Europe editor Peter Foster thinks so. “A new PM will have to be given a hearing by the EU side,” he tweeted. “Everyone in Europe knew [May] was a busted flush, that it was pointless handing her concessions since it was clear they would not get the Withdrawal Agreement over the line.
“A new PM must show that concessions [on the backstop’s time limit, say] would… clinch a clear, stable majority in Parliament. [But] the negative coalition of 'No dealers' and 'No Brexiters' makes the chances of a PM getting a solid majority for such a plan extremely low. Can impending crisis - and the fear of elections - concentrate minds?” 
It’s worth remembering that while our future relationship with the EU dominates the UK debate, currencies move for a variety of reasons. “While Brexit will be an obvious focus, future relationships with potential trade partners will also be important,” says Brand. “Boris Johnson, for example, might not be liked by the EU – but would be by President Trump.”

Lib Dem fever

A YouGov poll of Westminster voting intentions at the end of May put the Liberal Democrats (Lib Dem) in first place, hard on the heels of a Brexit Party win in the Euros. This will have further concentrated Tory minds – and will also have attracted the attention of currency markets.
The Tory choice will determine Theresa May’s immediate successor; the tone of what might be the last chance to agree terms with the EU; and the immediate prospects for sterling.
But even as the Lib Dem’s post European election surge subsides, the next General Election is likely to leave the party’s leader in a position – as in 2010 – to steer the UK’s political and economic future.
And with Jo Swinson, if she were to win the Lib Dem leadership, calling the shots, a much softer Brexit and probably a second referendum would be on the cards if we’re still in the EU by then.
Projected Lib Dem share of vote in YouGov poll after European elections
'By then…’ Most Tory MPs wanted to avoid an early General Election even before the Lib Dem surge and the disastrous European Parliament elections.  But with the Parliamentary impasse, there is a decent chance that whoever the PM is will decide a General Election is preferable to a People’s Vote in an attempt to break the deadlock before Halloween. 
So the Lib Dem (and Brexit party…) take on trade, the EU, business and the economy are suddenly material again to the fortunes of sterling, rates and risk – all of which remain stuck in ‘uncertain’ territory until the crunch comes.
And if the YouGov poll is right and the Commons ends up in a complex four-way split, expect sterling volatility to persist right the way through to Christmas…

Key takeaways - sterling 'loves' the EU

  • A Brexit ‘no-dealer’ winning the race for No.10 would likely hurt the pound. 
  • There will still be time between the end of the leadership contest and 31 October deadline to avoid a no deal.

  • The Tory leadership vote will define Brexit and therefore shift currency markets. But keep a close eye on future relationships with potential trade partners, too.