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GBP Bears Beware: Boris as UK Prime Minister Might be Good for Sterling

GBP Bears Beware: Boris as UK Prime Minister Might be Good for Sterling

2019-05-22 15:15:00
Martin Essex, MSTA, Analyst
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GBP price, Boris Johnson and Brexit:

  • Former UK Foreign Secretary Boris Johnson is in pole position to take over from Theresa May as the next British Prime Minister.
  • However, traders looking to sell Sterling on the grounds that the risk of a no-deal Brexit would then rise need to be aware that his commitment to leaving on WTO rules could change.

Boris, Brexit and the British Pound

Former British Foreign Secretary Boris Johnson has become the clear favorite to replace Theresa May as UK Prime Minister if, as expected, she resigns in the coming days. For many traders, that would be a strong signal to sell the British Pound as he is widely seen as a hard-line Brexiteer who would take the UK out of the EU without a deal.

Leaving without an agreement, and reverting to World Trade Organization (WTO) rules, is seen widely as negative for Sterling. However, Johnson – known countrywide simply as Boris – has changed his mind on Brexit before and might not be as committed to no-deal as he is sometimes seen.

As the Conservative-leaning magazine The Spectator asked: “Would he govern as a reckless populist, delighting the Tory membership by driving Britain out of the EU without a deal? Or would he carry out a Nixon to China reverse-ferret, pivoting to a softer Brexit position by way of a second referendum or even revoking Article 50 and starting again?

Indeed, Johnson himself has written: We who are part of this narrow majority [in favour of Brexit] must do everything we can to reassure the Remainers. We must reach out, we must heal, we must build bridges – because it is clear that some have feelings of dismay, and of loss, and confusion.”

What Johnson might mean for GBP

His commitment to a no-deal Brexit is therefore not as strong as sometimes portrayed and another “reverse-ferret” – British newspaper slang for reversing your position – cannot be ruled out, meaning there is no guarantee that if he becomes Prime Minister the Pound would extend its recent sharp decline.

GBPUSD Price Chart, Daily Timeframe (December 27, 2018 – May 22, 2019)

Latest GBPUSD price chart.

Chart by IG (You can click on it for a larger image)

For sure, there are plenty of reasons why GBP could weaken further, as I pointed out here. However, my recent Twitter poll on which possible successor to May would be best for Sterling put Johnson in second position, just behind the Opposition Labour Party’s Jeremy Corbyn. To reiterate, selling GBP on a possible Johnson premiership is risky.

Who could become UK Prime Minister?

Turning to the other runners and riders, the chart below shows that Johnson is not just ahead of the field but increased his lead sharply in May.

Odds on next UK prime minister.

Source: Michael McDonough, Bloomberg, on Twitter

According to the Oddscheker website at the time of writing, many betting companies are now quoting Johnson at 2/1 to take over from May. Here are the approximate odds on her other likely Conservative successors:

  • Dominic Raab, 5/1, is a former Brexit Secretary, now no longer in Government, and a Brexiteer. Verdict: negative for GBP.
  • Michael Gove, 10/1, is Environment Secretary and a long-time supporter of a hard Brexit. Verdict: negative for GBP.
  • Jeremy Hunt, 10/1, is Foreign Secretary and campaigned to remain in the EU before changing his mind. Verdict: mildly positive for GBP.
  • Penny Mordaunt, 20/1, is Defense Secretary and campaigned to leave the EU. Verdict: negative for GBP.
  • Matthew Hancock, 20/1, is Health Secretary and a potential centrist candidate. Verdict: neutral for GBP.
  • Sajid Javid, 20/1, is Home Secretary and voted reluctantly to remain in the EU. Verdict: mildly positive for GBP.

Further down the field, two other potential candidates have launched campaign groups: former Work and Pensions Secretary Esther McVey has unveiled a hardline Brexit group Blue Collar Conservatism (GBP negative) while her successor Amber Rudd has launched a centrist Remain group called One Nation (GBP positive).

More to read:

British Pound: What every trader needs to know

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--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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