The announcement of Boris Johnson as the new leader of the Conservative Party and, by default, the UK’s new Prime Minister met with a subdued reaction from the currency markets. There was little reaction from the pound on the day, but sterling has been under pressure for some time due to the political uncertainty.
What happened to the pound during the leadership race?
After Theresa May announced her resignation towards the end of May, the pound dipped against the euro. During the televised debates between candidates, the pound dropped slightly as few in the running appeared to rule out a no-deal Brexit. By the time of the debate between the final two candidates – Boris Johnson and Jeremy Hunt – Brexit rhetoric had intensified, with both candidates pledging to leave the EU by 31st October regardless of the consequence and the pound took another tumble after the debate aired.
As the date of the announcement grew closer, the pound faced a perfect storm of negative factors on 16th July; ecostats showed that the economy was slowing down, business confidence was waning and the pound was harried by uncertainty over the outcome of the leadership elections and Brexit. While the pound didn’t react to the announcement of the new PM, it was clear that removing some measure of uncertainty wasn’t enough and the pound remained under pressure and hovering not far from its lowest level since April 2017.
What next for sterling and Brexit?
It appears that at the moment, both the fate of Boris Johnson as PM and the fate of the pound are tied to Brexit. Rumours of positive developments which lead to a new departure deal should prove positive for both; increased likelihood of a no-deal departure from the EU will cause added pressure. Parliament has repeatedly rejected the idea of accepting a no-deal Brexit and many of those objecting come from the Conservative Party.
The election of Jo Swinson as leader of the newly revitalised Liberal Democrats and her determination to oppose Brexit, together with the challenge of The Brexit Party insisting that the UK’s Prime Minister sees the process through, means that Johnson faces challenges from all sides in parliament. His swift action to appoint a new Cabinet – which included a swathe of resignations and departures as well as the return of some controversial figures – suggested a PM with determination and sterling firmed as a result.
However, Johnson may have been in a brief honeymoon period and concrete action will be needed to back his rhetoric and political manoeuvring. After the European Elections saw both the Conservatives and Labour lose seats to pro- and anti-Brexit parties, it’s clear that if another general election is called, there will be further market volatility ahead as the unprecedented circumstances will make the outcome difficult to predict.
No deal is a big deal for the pound
The most significant influence on the pound at the moment is the prospect of the UK leaving the EU without a deal. This is causing the pound to fall against the euro and the US dollar. Some analysts have warned that the pound may reach parity with the US dollar if the UK does opt for a cliff-edge Brexit. Boris Johnson claims this is a last resort, but the new PM’s refusal to rule out such an outcome is causing some nervousness in the market and this is putting a lot of pressure on sterling.
If the current rhetoric continues and is taken into the negotiations, the pound may have some difficult days ahead. The next three months are likely to see significant volatility; it’s likely the market will seize on any positive news regarding the progress of the negotiations, but may have further to fall if the new team meets the same impasse regarding the Irish border.