Is the Pound Set to Suffer Amidst Johnson’s Latest Political Woes?

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Another day of political turmoil awaits the Johnson administration after two top cabinet ministers Sunak and Javid resigned yesterday. But does the British pound care?

What has Boris Johnson done now?

Not for the first time, Boris Johnson’s honesty and integrity were attacked. Johnson had previously denied all knowledge that a former deputy whip (Christopher Pincher) had been subjected to sexual misconduct complaints in 2019, before being hired. He also resisted initial calls to suspend Pincher last week when “recent allegations” of sexual misconduct emerged.

A top British civil servant has since claimed Johnson’s office was not truthful on the matter, urging two senior cabinet members to resign yesterday after Johnson apologizes for his latest mishap.

  • Rishi Sunak, former Chancellor of the Exchequer said “For me to retire while the world is suffering the economic consequences of the pandemic, the war in Ukraine and other major challenges is a decision I have not taken lightly.”
  • British Health Minister Sajid Javid also resigned and said in a letter that it is “… clear to me that this situation will not change under your leadership – and you have therefore also lost my faith …”

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Will others resign from Johnson’s cabinet?

It is clearly a blow for Johnson to lose two senior figures although (so far) they remain the only two top cabinet officials to resign. The question now is whether others will follow suit, but it currently seems unlikely with support from other senior figures. Foreign Minister Liz Truss, being just one of them, said she is “100% behind the PM”.

Will Boris Johnson be removed?

Looking back, it’s hard to count all the calls we’ve heard for the end of Boris Johnson as PM. Despite being told “this is the one,” every time he seems to jump his way to the next scandal – much like Teflon Trump. Just a few weeks ago he narrowly experienced a vote of confidence that earned him a 12-month grace period for not facing another. But if some legislators have their way, the rules will be changed to shorten the grace period and hold another confidence vote.

In particular, other lawmakers are trying to convince key cabinet members of Johnson’s team to move against him, seemingly to no avail.

Until senior members turn against him in force, or the confidence vote can be held much earlier, his removal looks unlikely – despite the public sentiment being against him.

Will Boris Johnson resign?

69% of Britons think Johnson should retire, according to a quick YouGov poll. Yet that seems highly unlikely because of his reluctance to resign after each and every call from him to do just that over the years. And because Johnson quickly replaced Javid with Nadhim Zahawi as his new finance minister, suggests Johnson will fight to stay in power. In addition, he was “actively thinking” about a third term when asked about it a few weeks ago, and I doubt much has changed since then.

What does this mean for the British pound?

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The British pound has fallen to its lowest level since the pandemic yesterday, but we cannot give Johnson all of the credit. The U.S. dollar rose to new highs and rose against all major FX pairs yesterday as fears of a global recession intensified.

The macro-outlook for the UK is terrible, with business confidence falling to an 8-quarter low and a consumer outlook being their most pessimistic on record (and those data include the GFC and COVID). Inflation is through the roof, growth is faltering and Britain is heading for a recession. But with the government in disarray and the UK heading for a recession, its removal could end up being a net positive for the British pound. At least initially.

GBP / USD 1-hour chart:

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While the trend is clearly lower, the odds seem to favor a countertrend move on GBP / USD on the 1-hour chart. Support was found at 1.1900 yesterday and prices are now trading back above the weekly S1 pivot point and 2016 low. The 1-hour chart is also in the process of forming an bullish outer candle and a higher low. From here the bias is to move back to 1.2000 near the 38.2% Fibonacci ratio. If such an accumulation were to materialize, a break above 1,200 would focus on the other Fibonacci ratios. However, we will also look for evidence of a high swing to form the end of the current rally, as it allows bears to better align themselves for bearish opportunities at higher prices.

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