Johnson-Corbyn debate preview: Three scenarios for GBP/USD as the election heats up

Two of the most unpopular British leaders are facing each other in prime time television – and pound investors will be watching. Prime Minister Boris Johnson of the Conservatives and Labour leader Jeremy Corbyn have been confronting each other in parliament. Still, this one-on-one debate is broader and scope and clean of parliamentarians' noise. 

Markets prefer Johnson to win an outright majority that would lead to ratifying the Brexit accord and enacting more market-friendly policies. While the PM's latest announcement of abandoning corporate tax cuts has disappointed business, the center-right party is preferred over the center-left one – which has veered to the harder left under Corbyn.

Moreover, the opposition proposes reopening the Brexit accord and then putting it to a referendum. While a softer version of Brexit and potentially staying in the EU are better propositions for investors than Johnson's hard Brexit – pound bulls prefer certainty over a patchwork coalition under Labour. 

Brexit, economic policy, the National Health Service (NHS), crime, and climate are among the topic. Both men will try to score points against each other. Their performance – and political analysts' remarks – will determine who wins and where the pound may go afterward.

Here are three scenarios:

1) Boris Johnson wins

In this scenario, the PM convinces viewers, many exhausted from the Brexit saga, that his Brexit deal is ready to go and that it is good enough for Britain. He may also win by ridiculing Labour's position – which may campaign against a new Brexit deal it negotiates. 

Johnson would need to defend his party's record on the NHS, where senior health figures have just said that staffing issues are endangering patients. He may promise to turn a page and saying he offers a new policy. On the economy, the PM's strong points are the low unemployment rate and rising standards of living – as reflected by real wage growth. The Tories' climate policies may be satisfactory for many voters, and the right-wing party is a natural fit for fighting crime. 

Markets would expect the Conservative-Labour gap to grow, leading to an absolute majority in the December 12 poll – and less uncertainty already now. GBP/USD may advance to higher ground, potentially breaking above 1.30, hitting the highest since May.

2) Jeremy Corbyn makes a comeback

In this case, the leader of the opposition pokes holes in the government's Brexit accord, by pointing out that it provides less protection for workers, as well as the environment. Moreover, he may attack the Conservative and Unionist Party – the full name of his rival's outfit – for breaking the union. Customs checks along the Irish Sea and growing demand for Scottish independence are key. 

Or, he may just ask viewers to assess: What is in the Brexit deal for me? 

Labour is the natural party of the NHS and Corbyn may score easier points by blaming nine years of Tory governments for the crisis. He may blast Boris Johnson's promises as hollow, amid the latter's record of u-turns. A Corbyn victory in the debate also goes through putting the blame for rising crime on the ruling party that has been underfunding the police, On climate, Corbyn may claim that Labour has more ambitious plans for reaching zero emissions within a reasonable timeframe.

If Corbyn scores more points, investors would expect the gap to narrow, leading to a hung parliament – practically a loss for Johnson who called the elections. GBP/USD has room to lose ground, potentially falling below 1.29.

3) Ugly contest

In this scenario, each side scores points on his strengths – Johnson on Brexit and Corbyn on health. Arguments about the economy and crime end in a shouting match, while the climate is pushed down to the bottom of the agenda.

In his scenario, the current 10% lead for the Conservatives would likely be maintained – a pound-positive outcome. However, the reaction may slower without a clear cut winner. Investors may await political analysts to draw a verdict. 

Conclusion

The first debate of the 2019 elections is critical for the pound. Low volatility at the time of ITV's debate, 20:00 GMT, may lead to erratic moves. A victory for Johnson may send sterling surging, while a solid performance for Corbyn may send the pound plunging. A draw is also positive. 

See Election Analysis Fear of Corbyn Outweighs Fear of Brexit