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The United Kingdom experienced some major political changes: Boris Johnson became the country’s new Prime Minister. The previous PM Theresa May stepped down as the leader of the Conservative party on June 7 as she was not able to deliver Brexit. Johnson, on the contrary, occupies an outspoken pro-Brexit position. The promise to take Britain out of the European Union on October 31 “no matter what” was the key element of his campaign and he shows all intention to deliver.
The first step has already happened: Johnson filled his cabinet with Brexit-supporters. The agenda for the new cabinet is to persuade the EU to agree to a new withdrawal deal. According to Johnson, if Brexit with a deal is to happen, then the notorious Irish border backstop should be dealt with separately.
The impact on the GBP
As you can see, a month and a half have passed since May’s resignation. Boris Johnson has always been the main candidate for the position of the PM. As a result, investors had got pretty used to the idea that he will be the one to take charge. In other words, Johnson’s leadership and his determination to have Brexit, even a no-deal one, is mostly priced in the pound’s exchange rate. That’s why the GBP didn’t crash on the news: on the contrary, the GBP managed to stabilize a bit versus the USD and the USD as traders took profit on their GBP shorts.
Despite this fact, the general sentiment for the GBP is rather sour. At this point, the uncertainty on how exactly Brexit will happen stands. Moreover, the risk of a General Election at some point has increased. Finally, the current government doesn’t have an overwhelming parliamentary majority which makes its position shaky. All this means that the long-term bearish trend for the GBP remains intact.
In the upcoming days, the market will be sensitive both to comments from Johnson’s office and the European policymakers as both parties will tread water and reconnoiter the ground. It’s clear that the sides are extremely divided. So far, Europe claimed that they wouldn’t rewrite the withdrawal agreement, but could be willing to change a so-called political declaration on future ties.
In the near-term, the good thing for the GBP is that Johnson doesn’t renounce the possibility of a compromise. Such an approach keeps the “Brexit-with-a-deal” option on the table and thus provides the GBP with some support.
Conclusion
Given all said above, the current situation warrants an approach of selling the GBP on its attempts to recover, although having reasonable and modest targets. Remember that two members of the Bank of England (Haldane and Saunders) indicated they are not likely to vote for a rate hike in the near term.
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