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Sterling up as prime minister to go

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Written by:
07/07/2022
GBP has risen on the news that prime minister Boris Johnson is to step down amid a spate of resignations from Conservative MPs.

Sterling has risen 0.5%, heading back to $1.20 on the news that Johnson has decided to resign as PM.

Mike Owens, global sales trader at Saxo Markets, said: “Although predominately driven by the strong dollar, another less significant factor pushing the pound lower over recent weeks has been the political uncertainty, so I think we can expect to see some relief being priced into the UK currency as more details of Johnson’s plan to step down are announced.

He said: “Financial markets prefer certainty, and this situation is no different. We also see the FTSE 250 hitting the highs of the session, although it’s a strong morning for European equities in general and difficult to attribute much of the move to the political headlines.”

Meanwhile, the FTSE 100 remained in positive territory since the announcement.

Effect of Boris’ resignation on fiscal and monetary policy

Paul Dales, chief UK economist at consultancy Capital Economics, said a lot depends on who is the next PM

“Overall, it’s important not to overstate the economic implications of what is undoubtedly a big political event. And a lot depends on who is the next PM. But to the extent it does matter for the economy, the door to looser fiscal policy may have been nudged open. However, that may just mean the Bank of England has to raise interest rates further to offset any resulting boost to inflation.

“Perhaps the key point is that all candidates will have to lean towards lower taxation to have a chance of being voted in by Conservative party members. What would matter most is whether that comes alongside some desire for fiscal discipline or an ideological want for lower taxes regardless.

“The latter may add to inflationary pressure if it leads to a net loosening in fiscal policy, while the former may not if lower taxes are funded by higher taxes elsewhere and/or spending cuts. The other possibility in all this is that there is a snap general election. But giving the current poor polling of the conservatives and the cost-of-living crisis, the new PM will presumably want to hold on until much closer to the last possible date of 24 January 2025.”

He said Johnson’s resignation would “lend some support to our view that interest rates will rise from 1.25% now to 3% next year”.

But, Dales added that the economy is “now in a worse place than when Theresa May resigned in 2019’.

 

“It is on the cusp of a recession and inflation is at a 40-year-high of 9.1%,” he added.

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