After months of scandal, accusations of lying to Parliament and challenges to his leadership, the UK Prime Minister Boris Johnson has resigned his position. This comes after a flood of resignations from his Government, after one scandal too many. The initial reaction of financial markets to this news has been positive for GBP.
- The downfall of a populist prime minister will be seen as a positive
- The race is now on to find a replacement
- For now at least, financial markets are taking this as a positive for GBP
The time-line of events
Boris Johnson won a vote of confidence in his leadership in early June. However, the narrow margin of his victory left him on a tightrope. Yet another scandal in his Government broke over the weekend. As his team scrambled to talk their way out of it, it emerged that the excuses were based on a series of lies.
Subsequently, on Tuesday evening, two of Johnson’s top ministers (Rishi Sunak, finance minister, and Sajid Javid, health minister) resigned their roles, citing integrity concerns. The next morning, that led to a flood of resignations from Johnson’s government. Ministers and aides quit at a record pace.
Johnson initially vowed to fight on, defying calls from all sides of the political divide to stand down. However, the resignations just kept coming and numbered over 50 this morning. This was just before news of Johnson’s resignation filtered through the media.
Time for a change of political approach
Boris Johnson’s departure will likely bring many changes to several aspects of the UK government’s approach.
It is far too early to know who from within the Conservative Party will replace Johnson. However, given the nature of his departure, it is likely that Johnson’s replacement will be less divisive or populist. There are several more pragmatic or consensual candidates. Fiscal conservatism (something appreciated by financial markets) is a feature of some of the leading candidates.
The BBC has run a list of:
- Rishi Sunak – a fiscal conservative, is seen as one of the front runners. Would be the overwhelming favourite if not for negative press on his and his wife’s tax affairs.
- Liz Truss – Foreign Secretary and someone who has taken a belligerent stance over the UK’s relationship with the EU in a post-Brexit world.
- Sajid Javid – a moderate who is well thought of in the Conservative Party. A fiscal conservative and ex-investment banker.
- Michael Gove – a shrewd political operator, but someone who is may be too divisive to win significant support
- Nadhim Zahawi – a relative newcomer who has been a Johnson supporter until the past 24 hours.
- Jeremy Hunt – a steady, statesman-like operator, a “Remainer” at heart and is by no means a pro-Brexit candidate.
- Suella Braverman – a staunch Brexiteer, pro-Johnson.
- Penny Mordaunt – a well-respected operator, but relatively unknown.
- Ben Wallace – Defence Secretary, seen as having a strong response to the war in Ukraine.
- Tom Tugendhat – a moderate and pragmatic MP (versus Johnson’s populist views) seen as a complete change of direction.
- Steve Baker – a hardline Brexiteer.
It is far too early to say who from this list will be selected to be the next Prime Minister. However, most of them would likely take a less hardline stance when it comes to issues such as Brexit. This may perhaps usher in a more consensual relationship with the EU, which is something that would please financial markets. So would a more fiscally conservative prime minister at a time where high inflation is a key issue.
The impact on UK assets: Initially positive for GBP
It is interesting to see that there has been a reaction on UK assets this morning:
- UK Gilt yields have moved initially higher but have since moderated the move.
- GBP has strengthened.
The main focus will be on GBP. The strength of the USD has been a huge factor across major markets for weeks. However, the growing UK political risk surrounding Boris Johnson will have weighed on GBP (although perhaps not by much). It is interesting to see GBP rallying on the news this morning. There has been a reaction across major forex.
The USD and JPY are already fighting back. However, GBP is remaining relatively strong versus the EUR. Subsequently, this may turn out to be the best way to play this political news – a GBP recovery against the EUR (pulling EUR/GBP lower).
GBP has been outperforming the EUR in recent days as the political drama has played out. There has been a decisive fall in EUR/GBP since the first resignations (of Sunak and Javid) on Tuesday around 1800BST.
The improvement of the outlook of GBP versus EUR could be the main takeaway from a change of UK Prime Minister.
Looking at the medium-term technical analysis on EUR/GBP, we have already seen a shift in the outlook in recent days, helped by the improvement in the relative strength of GBP versus the EUR.
There is a decisive breach of the three-month uptrend, with the higher low at 0.8485 being tested. We will be looking at the reaction to the support band between 0.8475/0.8510 over the coming days. If this is breached, it would confirm a more corrective outlook on EUR/GBP that would be in line with a more GBP positive outlook versus the EUR.
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