Pound struggles as Boris gets further support

Jun 18, 2019

Sterling has continued to push lower as fervent Brexiteer Boris Johnson continues to gather support in his bid to become the new PM.

The first poll saw him take a huge share of the Tory MP votes and since then three out of the four candidates that have dropped out of the race (Leadsom, Hancock and McVey) have pledged their support for Boris. This makes him likely to gain an even bigger portion of the votes in tonight’s second vote.

Mr Johnson was a key figurehead for Leave in the Brexit referendum of 2016 and he’s pledged to take the UK out of the EU by the 31st Oct deadline with or without a deal. The market have therefore been pricing in higher odds of a disorderly Brexit, with a recent Reuters poll indicating median expectations for a no-deal shifting from 15% last month to around 25% in June.  Generally, a no-deal exit is expected to cause disruption to the economy and markets (at least in the short-term), which makes the pound less attractive to investors and hence leads to it weakening.  

The results of the second round of voting for the new Tory leader are expected around 6pm this evening. A candidate will need at least 33 votes to continue their bids. If they all receive over 33 votes, then the candidate with the fewer votes will be eliminated. Extra rounds of votes will continue to whittle down the candidate this week until only two remain. Thereafter Tory party members will vote to decide who will be the new leader/PM.

As a result, the GBP/USD has hit the lower levels since the start of the year having moved 2-cents lower from last week’s high. The GBP/EUR touched a 5-month low after losing nearly a cent yesterday.

Clearly, the Pound has moved a long way in a short period of time and some analysts feel that a lot of the negativity surrounding a (potential) incoming hard Brexiteer PM has been largely worked into Sterling. Furthermore, we are close to some important support levels (particularly in cable) which might provide a bit of a barrier. That said, it’s still hard to see where the immediate good news for Sterling will come from.

Sterling sellers might have to keep their hopes on there being weakness in the Euro and the USD instead. The ECB are beginning to sound less optimistic about the eurozone economy and tonight we will see whether the Federal Reserve’s tone is turning more negative. More negative tones from these two major central banks could come to sterling’s aid.

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