Was Dominic Cummings pushed to save the pound?

The abrupt fall from grace of Dominic Cummings, the much-admired and much-loathed adviser to UK Prime Minister Boris Johnson, has sparked all sorts of theories as to what was behind it, and with good reason.

Cummings’ actions have been divisive and often controversial, starting with his choice of “misfits and weirdos” to replace civil servants whom he sacked unceremoniously, to the famous drive he took across the country while both he and his wife were ill with Covid-19 and a national lockdown was in place.

There has been intense speculation as to why Boris Johnson, who stuck with Cummings through thick and thin and risked not only his reputation but the health of UK citizens by letting him get away with breaking lockdown rules, is now finally getting rid of his once-trusted adviser.

Of course, people like a good bit of old-style gossip, so there are a lot of stories going around that Johnson’s fiancé and former Conservative party press officer, Carrie Symonds, was at the origin of Cummings’ departure.

You may choose to believe that if you want, since it is a juicier story that what could be the more likely explanation: Johnson was staring into the abyss and decided to pull back at the last moment by sacrificing his close adviser.

The abyss I am referring to would not be, as many would believe, a no-deal Brexit — or at least not directly. Rather, it would be the rapid and irrevocable fall in sterling if a trade deal between the UK and the European Union is not reached.

We have seen in the reaction of the British pound immediately after the referendum what the markets think about the UK leaving the EU, and — to put it politely — they don’t think it’s a good move.

But in the past four years, markets have been nourished by hopes that a post-Brexit trade deal could still be reached, and the pound has hovered just above parity with the euro.

However, if a trade deal is not reached, what could follow would spell disaster for the UK economy, coming on top of the numerous problems caused by the Covid-19 pandemic.

Will a sterling collapse be averted?

If there is no post-Brexit trade deal with the EU, the ensuing collapse in the pound’s exchange rate would not be beneficial for the economy: exports would tank because of the sudden bureaucratic barriers that would be erected.

If there is no trade deal with the EU, the pound could take a dive.

The lack of an agreement on trade could deal the pound’s already diminished status of global reserve currency a mortal blow. The UK public debt has already ballooned following entirely justified measures to cushion the effects of the Covid-19 pandemic.

Forecasts by the European Commission put the UK’s debt-to-gross domestic product (GDP) ratio at 104.4% for 2020, 111% for next year and 113.7% for 2022, from 85.4% last year.

Some people will argue that certain countries in the EU look much worse when it comes to debt-to-GDP ratios. This may be true, but the European Central Bank has substantially changed its stance on buying bonds, and it has a bigger bazooka than the Bank of England.

The UK faces the very real risk of finding itself with a currency in freefall spooking foreign lenders, and the Bank of England forced to buy a much higher proportion of the debt the government has issued to deal with the Covid-19 pandemic.

While this kind of circular issuance of debt and currency can work for a while, there comes a time when inflation does take hold and it could quickly become rampant, especially for a country as dependent on imports as the UK is.

Perhaps Prime Minister Boris Johnson’s eyes have been opened to this particular threat by advisers other than the “misfits and weirdos” he has been listening to since he joined the Leave campaign.

If that is the case, expect a trade deal with the EU to be reached and the pound to soar. If not, a rough ride could follow.