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Boris Bounce for the pound: long term reversal or just a blip?

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The week’s big news is the resignation of the British Prime Minister, Boris Johnson. The pound did rally on the news – but nothing too earth shattering. The driver behind GBP (and of course, Euro) weakness this year has been dollar strength, rather than any local political problems.

Johnson’s resignation comes at a time of uncertainty and global tensions, in particular Ukraine, as the conflict wears on. The national economy and local financial markets are feeling the weight of high inflation and a more aggressive stance from the Federal Reserve and the Bank of England, both of which are raising headline interest rates, prompting talks of a possible recession.

Additionally, the UK is still handling regional issues that arose after Brexit, among them the question of Ireland.

“An appropriate change in leadership could help improve business sentiment in the country and help alleviate the effects of economic slowdown and high inflation,” said Wael Makarem, Senior Market Strategist – MENA at Exness. “It could also directly affect the current tax policy, which was widely criticized.”

Cold, hard reality

Financial markets reacted with some volatility on Thursday due to the uncertainty the resignation created. As such, they could rapidly change course as new information emerges regarding a successor.

“The rise in the value of the pound is a back-handed compliment for the regime that will take the place of the Johnson government,” said James Bentley, Director of Financial Markets Online. “Confidence has deserted the PM and the market is implying that what comes next can only be better.”

Sterling began to rise as soon as Johnson indicated he would finally leave office but, as is so often the case, a little initial euphoria could give way to the more mundane, cold, hard realities of the current economic malaise, which could let a little air out of the balloon.

One such scenario would be if he’s allowed to cling on in the interim until the Conservative Party conference.

Damage control

“His critics would say he’s done enough damage already and there won’t be a person alive who thinks he retains that kind of ‘good leaver’ status,” said Bentley. “The benefit of the doubt resigned long ago; even if he didn’t.”

The stock market also recorded some volatility but could find a positive trend while the political situation becomes clearer. The relief could however be temporary as a new government would still have to deal with inflation and slowing growth, two factors that have strongly impacted equities.

“A change of leader in the UK is probably unlikely to be the cause of any major recovery in the pound from its current depressed levels,” said David Jones, Chief Markets Strategist at Capital.com. “The ongoing inflation concerns and the real threat of a global recession continue to be far more important in the mind of markets.”

Nothing to see

Johnson’s departure hasn’t been viewed as a catastrophe for UK markets, and instead has largely been shrugged off. The bigger question now is who the next prime minister will be.

“Traders will want to know if a new leader is likely to lend support to the idea of further tax hikes,” said Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown. “On the other hand, a reduced tax environment may well be expansionary for the economy but does pose the risk of inflation lingering for longer.”

Either way, it would appear that as Boris shut the door to Number Ten after his speech yesterday, the door also slammed shut on the potential for market panic.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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