Is the pound set to suffer amidst Johnson’s latest political woes?

Research
Matt Simpson financial analyst
By :  ,  Market Analyst

What has Boris Johnson done now?

Not for the first time, Boris Johnson’s honesty and integrity have come under fire. Johnson has previously denied all knowledge that former deputy chief whip (Christopher Pincher) was subject to sexual misconduct complaints in 2019, before hiring him. He also resisted initial calls to suspend Pincher last week when “fresh allegations” of sexual misconduct arose.

A top British Civil servant has since claimed Johnson’s office was not being truthful on the matter, prompting two senior cabinet members to resign yesterday after Johnson apologies for his latest mishap.

 

  • Rishi Sunak, former Chancellor of the Exchequer said "For me to step down as while the world is suffering the economic consequences of the pandemic, the war in Ukraine and other serious challenges is a decision that I have not taken lightly."
  • UK health minister Sajid Javid also resigned and said in a letter that is “…clear to me that this situation will not change under your leadership - and you have therefore lost my confidence too…"

 

20220706forexCI

 

Will others resign from Johnson’s cabinet?

It is clearly a blow to Johnson to lose two senior figures although (so far) they remain the only two top-cabinet officials to resign. The question now is whether others will follow suit, but it currently appears unlikely with support from other senior figures. Foreign minister Liz Truss being just one of them saying said she was "100% behind the PM". 

 

Will Boris Johnson be ousted?

Looking back, it is hard to keep count of all the calls we’ve heard for the end of Boris Johnson as PM. Despite being told that “this is the one”, each time he seems to skip his way through to the next scandal – much like Teflon Trump. Just a few weeks ago he narrowly survived a confidence vote which earned him a 12-month grace period to not face another one. But if some lawmakers have their way the rules will be changed to shorten the grace period and hold another confidence vote.

Separately, other lawmakers are trying to convince top cabinet members of Johnson’s team to move against him, apparently to no avail.

Until senior members turn against him in force, or the vote of confidence can be held much sooner, his ousting looks unlikely – despite the public sentiment being against him.

 

Will Boris Johnson Resign?

69% of Britons think Johnson should step down, according to a snap YouGov poll. Yet this seems very unlikely given his reluctance to resign following each and every call for him to do just that over the years. And as Johnson was quick to replace Javid with Nadhim Zahawi as his new finance minister, it suggests Johnson will fight to stay in power. Besides, he was ‘actively thinking’ of a third term when asked about it a few weeks ago, and I doubt much has changed since then.

 

What does this mean for the British Pound?

20220706gbpusdM1ci

The British pound fell to its lowest level since the pandemic yesterday, but we can’t give Johnson all of the credit. The US dollar surged to new highs and rose against all major FX pairs yesterday as fears of a global recession intensified.

The macro-outlook for the UK is dire, with business confidence falling to an 8-quarter low and consumers outlook being their most pessimistic on record (and that data includes the GFC and COVID). Inflation is through the roof, growth is faltering and the UK is headed for a recession. But with the government in disarray and the UK headed for a recession, his ousting could end up being a net positive for the British pound. At least initially.

 

GBP/USD 1-hour chart:

20220706gbpusdD1ci

Whilst the trend is clearly lower, the odds appear to favour a countertrend move on GBP/USD on the 1-hour chart. Support was found at 1.1900 yesterday and prices are now trading back above the weekly S1 pivot point and 2016 low. The 1-hour chart is also in the process of forming a bullish outside candle and higher low. From here the bias is for a move back to 1.2000 near the 38.2% Fibonacci ratio. Should such a rally materialise, a break above 1.200 brings the other Fibonacci ratios into focus. However, we will also seek evidence of a swing high to form to mark the end of the current retracement, as it allows bears to better align themselves for bearish opportunities at higher prices.

 

Guide to Pound sterling ;

 

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