- UK PM Johnson is in deep political trouble over violating his government's covid rules.
- Political uncertainty is adverse for the pound in the short term.
- If Chancellor Sunak becomes PM, sterling could shine, yet the competition is fierce.
Bring your own booze, to a work event? Prime Minister Boris Johnson finds it harder to explain his behavior and he may be on his way out. That means short-term pain for sterling, but the potential for gains afterward.
Johnson has finally admitted he participated in a party in the garden of his residence but said he thought it was a work event. The unconvincing performance was heavily criticized by the opposition and caused unease among the PM's Conservative Party.
When asked if he would resign, Johnson only said he would not pre-empt the outcome of an inquiry. That means he is not ruling it out. This political uncertainty has capped the rally in GBP/USD that had been underpinned by Powell-driven dollar weakness.
The story will likely run for a few more weeks in which sterling could be hamstrung – markets hate uncertainty. If Johnson pulls it off once again and things return to normal, other issues would move the pound.
Sterling could suffer if Johnson resigns, but it could rise afterward. It all depends on who becomes PM.. The contest is within the Conservative Party, which has a broad majority in parliament.
Investors like Chancellor of the Exchequer Rishi Sunak, who is business-friendly and also popular among the public. If No. 2 becomes No. 1, sterling could rise. Sunak may be young, but he is undoubtedly seen as more serious than Johnson.
Another candidate is Foreign Secretary Liz Truss, who is popular among Tories. While she previously presided over trade agreements, her tough stance on Brexit may cause worry in markets.
Other candidates and an election scenario
There are several additional candidates to consider. Markets would be happy to see former Chancellor Sajid Javid, currently Health Secretary, or one of his predecessors at the job, Jeremy Hunt. They would dislike hardcore Brexiteers such as Dominic Raab and Priti Patel.
The worst-case scenario for markets is a snap election, which is a low-probability, high-risk event. First, it would drag political uncertainty for another six weeks. Secondly, it would increase the chance that Labour would gain power, albeit under moderate Keir Starmer, it would not be as scary as under his hard-left predecessor Jeremy Corbyn.
Overall, political uncertainty could drag the pound lower, but sterling could come on top if a more stable Conservative PM emerges.
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