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Brexit Bulletin: Johnson Against the Markets

Brexit Bulletin: Johnson Against the Markets

(Bloomberg) -- Today in Brexit: How low does the pound have to go to force Johnson to change course? 

What’s Happening?

Prime Minister Boris Johnson is taking on the foreign-exchange market, and it’s not clear he can win.

With Parliament on holiday and the political opposition in disarray, the currency market is now Johnson’s strongest opponent as he vows to lead the country out of the European Union with or without a deal in October. The pound has slumped more than 4% in July, set for the biggest monthly drop since the flash crash of October 2016.

Johnson came to power by promising Conservative Party members he would deliver what’s essentially the market’s worst nightmare – Brexit by any means. Investors gave him the benefit of the doubt – waiting to see if he would backtrack once in office. He hasn’t. It’s the classic populist playbook – what works for voters doesn’t always work for the markets.

The foreign-exchange market is a fiercer opponent than Johnson has had to take on so far. Investors are already talking about the prospect that market pressure will force him to change tack – and debating how high his pain threshold is.

“We have seen from time to time that the market is able to put pressure on governments,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG. “Increasing market turmoil could put the government under pressure to refrain from a no-deal Brexit. As a pain threshold, I could imagine a depreciation just above 10% in a short time that takes the currency close to parity against euro.”

Brexit Bulletin: Johnson Against the Markets

Bloomberg Economics’s Dan Hanson estimates that a no-deal exit would make the pound drop a further 13%. Deutsche Bank’s George Saravelos says a cliff-edge departure calls for “distressed sterling valuations.”

Johnson’s team is defiant. One senior official said the markets were now waking up to the realistic prospect of a no-deal exit, and the government isn’t about to soften its tone, Alex Morales reports.

But as Bloomberg’s John Authers writes today, the foreign-exchange market has a history of humiliating British prime ministers. What makes the calculation even more complicated for Johnson is that he might have to fight an election in the next few months. Winning an election before Brexit was always going to be a gamble. How about doing it with the pound in free fall?

Today’s Must-Reads

  • Johnson plans to spend hundreds of millions of pounds on hospitals and health-care technology, as he seeks to deliver on the most contentious pledge of the referendum campaign, Bloomberg’s Alex Morales reports.
  • The U.K. premier will embark on a new economic strategy known in his office as “boosterism,” the Financial Times reports. “Boosterism is a cool word, I think it will stick,” the paper cites one ally as saying.
  • The pound's plunge may not sow the seeds of an economic upswing this time.

Brexit in Brief

To Northern Ireland | Johnson heads to Northern Ireland, where he will renew calls for the devolved institutions to be restored. “The people of Northern Ireland have now been without an Executive and Assembly for two years and six months – put simply this is much, much too long,” he will say, according to his office.

No More Talks? | Johnson hinted on Tuesday that there may be no more talks with the EU. In a summary of his conversation with Irish Prime Minister Leo Varadkar, Johnson’s office referred to “any negotiations which may take place.” Johnson also said it was “up to the EU” to avoid a messy departure.

Go East | Welsh Secretary Alun Cairns said there will be markets for U.K. farmers beyond the EU if Britain leaves the bloc without a deal on Oct. 31. Farmers are unlikely to be reassured. The EU accounts for 89% of sheep-meat products the U.K. exports every year.

Brexit Bulletin: Johnson Against the Markets

Consumers Cheerful | U.K. consumer confidence increased in July after a turbulent start to the summer, according to GfK’s index. “Consumers have generally been less affected by Brexit uncertainties than business since the referendum,” said Joe Staton, the client strategy director at GfK. “However, the coming months to the Oct. 31 departure date will test the strength of this confidence.” 

To the Wire | Eurasia’s Mij Rahman reckons the real battle between the U.K. and the EU will be postponed until the next scheduled EU summit of Oct. 17-18. While some Johnson allies talk of calling for an emergency summit in September, the bloc could be reluctant to hint it’s ready to cave. 

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To contact the editor responsible for this story: Anne Pollak at apollak@bloomberg.net, Leila Taha

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