Boris’ Party Scandal and the Pound

As if politics hasn’t affected Sterling enough in recent years, the start of 2022 brings new political risks from Downing Street. 

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According to a leaked email last Monday, British Prime Minister Boris Johnson allegedly broke Covid restriction rules at a “bring your own booze” party in the gardens of No.10 during the first wave of lockdowns in May 2020.

Were investors to believe the UK was about to lose another leader, the geopolitical risk would be a headwind for the British pound.

To resign or not to resign?

Following an inquiry in the House of Commons on Wednesday, the British PM faces increasing calls from opposition and supporters to resign from his post for scorning his own government’s restriction rules.

Despite Boris publicly apologising on Wednesday night, bookies believe that the second half of 2022 will be the year of the PM’s exit. Few believe BJ will make it to the next general elections in three years. However, Boris still has support from the majority of his cabinet ministers. 

The support of Rishi Sunak – the favourite for the role if Boris was replaced - has been a decisive factor in reducing the threat of Boris getting forced out. Without a leadership contest, it would just be left for Boris to resign.

Traders shrug off politics, for now

GBP/USD traders continue to shrug off political developments with bigger considerations at play – namely Omicron and rising interest rates to combat inflation. The UK is reported to be well ahead of other developed countries in the race against Omicron.

In addition, with the BoE having hiked already once and expected to raise rates once more in February, markets seem to be pricing in the policy change already, ignoring the potential risks associated with political uncertainty.

Future risks from the scandal

The PM has to survive several flashpoints to stay in the game. 

1. The results of an investigation into possible covid rule breaches at Downing Street by civil servant Sue Gray or even an official one from the police could prove the final stroke for Johnson. 
2. BoJo could face severe pressure from veteran Conservative MPs if they decide he is no longer an electrical asset, with the local elections on May 5 front of mind.
3. A vote of no-confidence is on the line should more than 44 letters get submitted to Sir Graham Brady, chair of the 1922 committee of backbench Tories.

Apart from the political risks associated with appointing a new leader, additionally, if the situation remains uncertain, some are speculating that Boris could change his stance to a more hawkish one with the EU in ongoing Brexit talks to win back support from the backbenches.

GBP/USD continues ascent but faces resistance

The pound is trending higher (see below chart) but a correction can be expected as the daily charts hint at exhaustion above $1.37. 

Any correction could see the price fall back under former resistance at 1.36, while further gains might target the October high around $1.374.

GBP/USD daily candlestick chart

Source: SpreadEx Trading

Takeaways

If calls increase for Boris to resign, then the current uptrend will be at risk but until then, rate hike expectations for the UK and the US are the main driver.