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GBPUSD and the Likely Election of Boris Johnson as new Tory Leader


GBPUSD volatility has decreased in the last month as the market awaits the new conservative leader, and likewise the next UK Prime Minister. The pound has been trading below the 1.27 mark against USD over the past month, but increased uncertainty around Brexit could send the pound to levels of about 1.24 or lower.

Boris Johnson was the man of the Brexit campaign in the 2016 referendum and has promised to drive Great Britain out of the European Union with or without a deal. Since that time Boris Johnson is getting closer to become the next UK Prime Minister, and that has hurt Pound Sterling.

In the last week of July, the Conservative party members will vote to decide who will be the next leader. The new prime minister could seek to renegotiate parts of Theresa May’s deal; a non-binding political declaration, which sets out the future trade relationships between the Eurozone and Great Britain.

Boris Johnson has been the favorite candidate amongst MPs, and bookmakers are giving it an 80% probability that he will become the next UK PM. It does, therefore, look like it is more or less a done deal that he will be the next PM.

What to expect if Boris Johnson becomes the next UK PM?
Boris continues to support the Brexit strongly and pledges to take Britain out of the EU on October 31st regardless if any deal is agreed or not with the EU. Only the UK Parliament can stop him if he wins his party leadership and that means that there is a risk of an early general election in the country, a scenario that will also hurt Sterling, as it is anticipated that Nigel Farage could get a larget share of the UK parliament with his Brexit Party.

Currently, markets are pricing in a soft Brexit or a revocation of Article 50. However, as Boris Johnson heads to 10 Downing Street, these scenarios have become increasingly unlikely and with Boris in the driver seat, it looks like we are heading closer to a hard Brexit. Now markets have to evaluate how much the Sterling has discounted a Boris win and a no deal Brexit.

The Pound got a hit on the chin in Spring, from 1.31 in April ended down to 1.25 in June as the no deal Brexit scenario emerged along with Boris favorite for Downing 10. FX experts think that a softer Brexit could provide a boost to the UK economy by providing confidence to consumers and certainty to companies.

The best case scenario for the pound is a soft Brexit that can push the price up to 1.31 against the greenback (GBPUSD). The Bank of England can also boost the Pound. The latest UK interest rate decision came in as expected, keeping the interest rates at the current level but warned of the slowdown due to Brexit concerns. Any clues that UK interest rates might need to be raised in the future in a case of soft Brexit could lead to a sterling rally. Although the BoE has not been supportive to a rate cut in the recent policy meetings that might change if we get an agreement.

In case of a no-deal Brexit, most forex traders expect that GBPUSD will visit the lows from October 2016 at 1.1964. As Boris Johnson is getting closer to be the next Prime Minister, markets has started to discount also a no deal Brexit. Although investors have to be cautious in the case of that extreme scenario, I don’t expect that the price will hit the 2016 low. The British economy has been preparing for two years now to handle any outcome. Many analysts forecast a 5% drop in GDP in the case of no-deal, but as we are heading closer to the deadline, I estimate that the impact will be less severe.

One thing is for sure; the sterling will be in a roller coaster ride in upcoming months as Brexit headlines will cross wires, and we approach the October 31st deadline.

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