Johnson vs Hunt: Leadership Rivals Differ on More Than Just Brexit
- Johnson and Hunt differ in policies but agree that there is room to increase the spending budget
- GBP is in for further weakness as Brexit negotiations are likely to reach an impasse and no-deal is looking less likely
- GBP could fall to a par with USD if no-deal Brexit takes place as investors worry about the future of the UK economy
As the Tory leadership race draws closer to the end with expectations that a new Prime Minister (PM) will be announced on July 23, we can see GBP weakening as the increasing possibility of a no-deal Brexit worries investors. GBPUSD dipped on Tuesday to levels not seen since April 2017 after both Jeremy Hunt and Boris Johnson hardened their stance on Brexit to try and win the support of more hard-line Conservative Brexiteers. The pound has already fallen 1% against the euro and more than 2% against the dollar this month. The fall seen at the beginning of the week could be the start of a wave of selling in sterling on the back of Brexit uncertainty, which could see GBPUSD hit fresh lows if Boris Johnson continues to threaten the stability of the UK economy with his stated intention to leave the EU on October 31, deal or no-deal.
It is hard not to talk about Brexit when comparing both candidates, as it seems like that is the main focus of party members when deciding who to vote for as their next leader, forgetting that despite Brexit and its outcome, the new PM will still need to propose and implement policies in order to govern the country until the next round of general elections, which could come sooner rather than later. So here are a few differences between the two candidates which highlight their different campaign promises they will be working on if elected as the new PM, starting with Brexit of course.
Brexit – Head-on clash between Tory members
This has been the main selling point of his campaign as he is seen to be the one most likely to deliver Brexit by the October 31 deadline no matter what the outcome. Although this is a cause of concern for many, the back and forth of withdrawal agreement talks has worked the last nerve of many Conservative members who just want to see an end to the Brexit uncertainty. There have been news reports that Boris Johnson would be willing to suspend Parliament for two weeks leading up to the October 31 deadline to avoid MPs from blocking a no-deal Brexit, but the rumours have so far been denied by the Mr. Johnson’s team who ensure that he would like to deliver Brexit with a deal in place.
Seeing how GBP has behaved in the last few days as the deadline approaches, we can expect markets to become bearish on sterling if Boris Johnson is elected as the new PM. GBP soared on Thursday on reports that the House of Lords was taking the necessary steps to prevent Boris Johnson from being able to suspend parliament in the weeks leading up to the Brexit deadline, showing that investor’s would like to avoid any disruption to the UK economy which would come from a hard divorce from the EU. Despite the efforts to avoid a no-deal happening, Boris Johnson’s election as PM will still see some weakness in sterling, especially against EUR and safe-haven assets like USD and JPY. If a no-deal Brexit were to take place, we could see sterling fall to parity with the USD and return to 2008 financial crisis levels against EUR where the exchange rate fluctuated around 1.05.
He has focused his campaign on trying to convince supporters that he would be able to create a new deal with the European Union (EU) before or around the deadline, with an acceptance to push the withdrawal date back slightly to allow the negotiations time to take place. But as it becomes less likely that the EU will modify the current agreement Mr. Hunt has hardened his stance by suggesting he would provide a no-deal Brexit budget in early September and would cover the costs of tariffs that could be imposed on the farming and fishing industries. Unlike Mr. Johnson, he firmly opposes suspending Parliament to ensure a no-deal Brexit takes places and he is willing to show more flexibility with EU negotiators to ensure a deal can be reached for an orderly exit.
But seeing that a no-deal is unlikely to succeed, and the EU is not willing to budge on the contentious Irish back stop, we can expect the Brexit uncertainty to continue in the coming months as possible deadlock solutions are put forward. Nonetheless, GBP will continue to face selling pressure until the political impasse is resolved.
Public Spending – Attempt to counteract Brexit damage
He pledges to spend the funds needed to add an extra 20,000 police officers by 2022 and is likely to commit a large part of funds on infrastructures going from his previous experience as Mayor of London.
Plans to increase defence spending to 2.5% of GDP over the next five years and will cover the cost of a no-deal Brexit on farming and fishing with an estimated cost of £6 billion.
Taxes – Conservative’s way to please businesses
His main focus is to raise the threshold for the 40% tax rate from GBP50,000 to GBP80,000, which is estimated to benefit around 3 million higher earners, many of which are thought to be Conservative party members. He is likely to face tough opposition in Parliament to get the changes through as this would cost around GBP10bn a year. He is also thought to want to review the sugar tax on soft drinks as part of a crackdown on unhealthy food taxes.
As a known entrepreneur he has focused on trying to make taxes more accommodative for smaller businesses. His first proposition is to cut corporation tax from 19% to 12.5% to attract more businesses and create an innovation hub in the UK, but this will also cost the UK approximately GBP13bn a year. He has also campaigned to increase the threshold for national insurance payments to GBP12,000 and to remove a host of business rates for high street shops.
But at a time when the economy is looking fragile and markets are struggling, the reliance on fiscal policy to safeguard the economy will ramp up the nation’s budget deficit. Although the move might be necessary to counteract the shrinkage in private investment in the case of a no-deal Brexit or worsening global economic conditions, both candidates will struggle to balance the need for fiscal stimulus and recessionary caution without the help of the Bank of England.
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--- Written by Daniela Sabin Hathorn, Junior Analyst
To contact Daniela, email her at Daniela.Sabin@ig.com
Follow Daniela on Twitter @HathornSabin
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.