Possibility of Boris Johnson Resignation Could Boost Pound, Strategists Say
Currency traders are starting to factor in a new trigger for the rally in the British pound: the possibility that Boris Johnson will step down.
Far from the eroding the gains that have made sterling one of the top performers versus the dollar this month, the prospect of the prime minister’s resignation could give the currency a further lift, according to some strategists.
That comes against the backdrop of broadly improving sentiment on the pound as traders set their sights on a Bank of England tightening cycle and a potential shift to the endemic stage of Covid-19.
“A strong and stable leadership could set the pound on a better course, though we would have to get beyond any leadership shenanigans first,” said Jane Foley, the head of foreign-exchange strategy at Rabobank in London. “Currencies tend to like strong leaders. The politics around Johnson right now are a distraction.”
Johnson is facing growing calls to resign, both from within his own Conservative Party and among opponents, after he admitted attending a party in the gardens of No. 10 Downing Street during the first pandemic lockdown, effectively flouting the government’s own distancing rules.
Yet that’s done little to take the edge off sterling. The pound is currently trading at its highest level versus the dollar since October as money markets bet the BOE will embark on its first series of interest-rate increases since 2017. It’s near a two-year high versus the euro, after appreciating 0.6% this year.
Political developments have been a key driver for sterling for much of the past decade, with a popular vote on Scottish independence in 2014 followed by another on Brexit two years later. The latter led to years of volatility amid negotiations with the European Union, and sterling is yet to recoup its pre-referendum strength.
It’s a striking contrast with current sentiment, which has turned less bearish in the options market, according to short- and longer-term measures. Hedge funds and institutional asset managers alike are also scaling back wagers on the pound’s decline, after they ballooned in December to the most since at least August 2020.
The pound rose 0.2% to $1.3731 as of 7:31 a.m. in New York. It was little changed versus the euro at 83.51 pence.
Johnson’s departure is still far from certain. Most Conservative lawmakers interviewed by Bloomberg said they would wait for the findings of a formal probe into the Downing Street party before deciding on next steps. It would take 54 of them, or 15% of the total, to trigger a vote on Johnson’s future.
“The pound is not embedding any political risk at the moment, which would in theory make it vulnerable to the downside if markets start to see the recent developments as a net-negative factor for the currency,” a team of strategists at ING Bank NV including London-based Francesco Pesole wrote in a note. “We doubt, however, this will be the case.”
Johnson upset markets by rejecting a close relationship with the European Union during the Brexit negotiations, quitting the bloc’s single market and customs union. That hurt the City of London and has erected new trade barriers with the EU.
The prime minister has regularly stoked tension with the EU by threatening to go back on the Brexit deal, especially over Northern Ireland. Such threats have drawn condemnation from the U.S., denting the chances of a trade agreement with President Joe Biden’s administration. It has also raised the prospect of a retaliatory trade war with the EU.
All this has weighed on the pound, which delivered a 1% loss against the greenback last year, its first since 2018. Since the U.K. voted to leave the EU in June 2016, price swings in sterling have exceeded those in the euro, hitting the highest in a decade at the peak of the pandemic.
“This Boris factor, which has weighed on business investment, weighed on U.K. assets, basically for the last five years, could be eliminated this year if he is replaced by a more sensible leader,” Kallum Pickering, a senior economist at Berenberg in London, said on a Jan. 11 call.
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