Boris and Betty: Trading GBP amid political armageddon
UK Prime Minister Boris Johnson announced his resignation this morning after another wave of cabinet departures overnight made his position untenable.
He will remain in his post until a new leader is appointed no later than the Conservative Party’s annual conference in October. Parliament is due to break up for summer recess on July 21 so the process may have to be expedited. How long the process takes depends on how many candidates come forward for the role, but it will provide a period of headline risk affecting GBP/USD.
As he continued to lurch from one crisis to another the GBPUSD, (colloquially known as Betty from Cockney rhyming slang for cable – Betty Grable), took a battering. As the political landscape in the UK deteriorated the currency bore the brunt of the upheaval. A currency’s value is influenced by more than just economic factors like interest rates and inflation. Even the most experienced market players can get outflanked by political influence on currency trading.
Knowing how politics works in relation to foreign exchange markets can be useful when it comes to your trading decisions. Countries that have strong political stability are far more attractive to foreign investors. As such political stability can have a dramatic effect on currency rates. Serious inquiries into government conduct can destabilise the economy and weaken the currency.
So how should you be trading GBP?
There are two ways you can look at this. The dust settles and Boris stays in his post until October, GBP stabilises but will be vulnerable to further headline risk as the leadership contest continues, the support level gives way and we’re into the unknown in terms of the next multi-year support level.
So what happens now Boris has resigned?
The initial move in GBP/USD suggests that the market is viewing a change in leadership is being considered a positive development for UK investments. A new Prime Minister could remove all the uncertainty and backlogs and allow for a government to function without dealing with daily scandals. Obviously, it depends on who ultimately is appointed, and hopefully be someone with a bold vision for boosting the economy which would likely be positive a for GBPUSD. A new prime minister could also announce a big spending package to win support or even introduce more sweeping reforms.
What is your sentiment on GBP/USD?
Don’t forget the Bank of England in all of this!
Another element of support for pound sterling is that The Bank of England remains hawkish. Just this morning Huw Pill, the Bank’s Chief Economist, said the Bank is prepared to hike interest rates at a quicker pace if needed to prevent inflation becoming entrenched.
With the Bank clearly entrenched in a rate hike cycle it could eventually be a boon for GBP in the near term as higher interest rates generally increase the value of a currency just as the economy hopefully recovers because of reforms.
How the process to find Johnson's successor will work – via Reuters:
- Candidates putting themselves forward for the leadership, - and there could be many, must be nominated by two other Conservative lawmakers.
- Conservative lawmakers then hold several rounds of votes to whittle down the field. Each time they are asked to vote for their favoured candidate in a secret ballot, and the person with the fewest votes is eliminated.
- This process is repeated until there are two candidates remaining. Votes previously have been held every Tuesday and Thursday but parliament is due to break for its six-week summer recess on July 21 so the process may have to be accelerated.
- The final two candidates are then put to a postal ballot of the wider Conservative Party membership, with the winner named the new leader.
- The leader of the party with a majority in the House of Commons is the de facto prime minister. He or she does not have to call a snap election, but has the power to do so.
How long will it all take?
The duration of the leadership contest can vary, depending on how many people put themselves forward. Theresa May became leader less than three weeks after David Cameron resigned in 2016 and all other contenders dropped out mid-race.
Johnson faced former health minister Jeremy Hunt in the run-off ballot of Conservative members to replace May in 2019, and took office two months after May announced her intention to resign.
Local media reported that Johnson had agreed with the chairman of the 1922 Committee, who will oversee the ballot, that a new leader should be in place before the party's annual conference in October.
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