Odds of Johnson Becoming Next PM Slashed: Implications for Pound Sterling

Boris Johnson

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- Snapshot: GBP/EUR 1.1285 +0.05% | GBP/USD 1.2710 +0.10%

- Johnson makes case for 'Brexit at all costs'

- Odds of Johnson succeeding May slashed over past 48 hours

- Analysts see tough few months ahead for Sterling

For foreign exchange markets, all eyes are fast turning to Boris Johnson, the current favourite to become the next UK Prime Minister, and his strategy to deliver Brexit.

The odds of Boris Johnson becoming the next Prime Minister have fallen notably over recent days, but ongoing market concerns of a summer and autumn of political upheaval in the UK are widely expected to keep Sterling under pressure.

Johnson has warned that the Conservative party faces an “existential crisis” if it does not see Brexit through by October 31, ruling out a snap general election, a second referendum or a further delay to the UK’s exit from the EU.

The comments were made at the Conservative's first leadership hustings, and confirms the prospect of a 'Brexit at all costs' come October 31 is a prospect foreign exchange traders must seriously consider.

The view was expressed in a meeting in parliament held by the One Nation group of MPs where Johnson made the case that he was “best placed to beat Jeremy Corbyn, excite people about conservatism and conservative values”.

It is the perceived ability of Johnson to defeat Corbyn in any upcoming General Election that has seen betting markets slash the odds of Boris Johnson becoming the next Prime Minister of the UK for a second successive day and ensure the front-runner becomes the focus for Sterling markets.

Johnson is now almost 'evens' to be the next PM according to Oddschecker, who scan the betting market and collate the odds on offer at the UK's leading bookmakers.

Johnson was 7/4 at the start of the week before going 6/4 on Tuesday befor falling further to 21/20 on Wednesday morning. By Wednesday afternoon odds had gone to 10/11.

The assessment on Johnson's chances of becoming Prime Minister come amidst an ongoing rout of the British Pound which has been falling against its major peers since early May.

The Pound was until May 2019's best-performing currency, but the failure of Prime Minister Theresa May's Brexit deal to pass parliament saw markets rapidly recalculate the prospect of a 'no deal' Brexit occurring on October 31.

The Pound-to-Euro exchange rate has fallen from above 1.17 and into the 1.12s over the course of the past four weeks; the Pound-to-Dollar exchange rate has fallen from the 1.31s and into the 1.26s.

The odds of Johnson succeeding Prime Minister Theresa May appear to have risen sharply after the release of his official campaign video which sent a timely reminder to the party that he has a proven track-record of winning across voters who would not normally vote Conservative.

In Johnson’s video he meets voters and promises one former Conservative voter that he will take Britain out of the EU on 31 October, deal or no deal.

Johnson expresses support for increased education funding and police numbers and shows Johnson agreeing with a voter on the need for more stop and search.

The Times meanwhile reports today that Johnson is winning across 'moderate' and 'rising star' Conservative MPs: moderates Rishi Sunak, Robert Jenrick and Oliver Dowden have reportedly hailed Johnson as a One Nation Conservative whose values can "inspire the country and revitalise our party" while fending off Jeremy Corbyn and Nigel Farage.

"The three of us represent different parts of the country, voted Leave and Remain, and have different backgrounds. But we all believe the dangers that face our nation and our party are too grave and too imminent to take a chance. We need to ask ourselves who can not only confront but defeat these twin threats. And if that’s the question, we believe there really is only one logical answer: Boris Johnson," say the trio in a piece published in the Times today.

Johnson has long been a favourite amongst the Conservative Party membership, however there were question marks as to whether he commanded the popularity amongst his parliamentary colleagues that would allow him to get onto the final ballot.

The Parliamentary party will start whittling down the field of candidates in a series of ballots starting next week and strong support for alternative candidates - amidst chatter of a so-called 'Stop Boris' movement - could have seen Johnson's chances killed off.

The popularity of Johnson amongst colleagues across the Conservative spectrum is however becoming clear and should therefore provide currency markets with a degree more certainty as traders will now be able to focus on one set of potential policy paths.

The UK currency tends to fall when uncertainty is rising, and rise when uncertainty is falling, therefore any developments that can offer some clarity on the outlook will be supportive. Of course these are early days, but we could well see Sterling settle were Johnson to strengthen his grip on the leadership race.

We reported yesterday that foreign exchange analysts at UK high-street bank Lloyds Bank are maintaining forecasts that suggest the Pound will end the year higher than where it is currently located.

The Pound-to-Euro exchange rate is currently quoted at 1.13, but it should go back towards the upper end of its 2019 range according to estimates.

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Sterling's Outlook Fraught with Political Tension

It could be the case that the Pound becomes increasingly reactive to what Johnson says over coming weeks: how does he plan to deliver Brexit at all costs on October 31 with a very difficult parliamentary arithmetic? Considering the EU are not open to renegotiate and that there is a majority in parliament against a 'no deal' Brexit, the new Prime Minister faces incredible challenges.

Yet, faced with the incredibly difficult political situation in the UK, it is understandable why analysts remain pessimistic on Sterling's prospects over the summer.

"The resignation of PM May will bring little respite for GBP from the impact of political uncertainty," says Jane Foley, Head of FX Strategy at Rabobank. "In our view GBP remains vulnerable in the near-term to fears that the new PM will take a more hard line on Brexit."

There is an acceptance amongst Conservative ranks that the EU are going to have to reopen negotiations on the Brexit deal with the new leader.

"The first task of our next prime minister will be to deliver on the Referendum result. That will mean having both the mettle and the charisma to make progress at the negotiating table. But it will also mean being able to galvanise the nation behind the deal that is struck," say Sunak, Jenrick and Dowden.

There is therefore a potential scenario where currency markets first have to keep an eye on the leadership race, and then on a fresh set of negotiations.

"The final weeks before the 31 October Brexit date are likely to be fraught with political tension and in the meantime GBP will be clouded by political woes," says Foley.

Rabobank holds a base-case is that Brexit will be delayed further into 2020, and should a fresh set of EU negotiations be agreed - or the new Prime Minister calls another General Election - it is possible to see this scenario playing out.

Rabobank forecast EUR/GBP will recover towards the 0.86 area on a 6 months view (GBP/EUR down to 1.1627). On a 'no deal' Brexit Rabobank see potential for GBP/USD to plunge to the 1.10 region and for EUR/GBP to push towards parity.

BannerTime to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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