ING considers that Brexit tensions pose a greater threat to the Pound that Prime Minister Johnson’s political future, but the most likely outcome is that political developments will not de-rail the currency.
It sees scope for further Pound gains as long as Brexit tensions can be contained; “Unless trade tensions escalate quickly, EUR/GBP should remain on track for a move to (or break below) 0.8300 in the near term (1.2048 for GBP/EUR.)
Any break would put GBP/EUR within touching distance of post-2016 referendum highs of 1.2080 and represent a 5-year high for the cross.
Sterling Resilient if PM Johnson Forced to Resign
ING notes that the pound held steady on Wednesday despite UK Prime Minister Boris Johnson started to face calls for his resignation from within the Conservative party following an admission before the House of Commons that he attended a party at Downing Street, contrary to coronavirus rules in England.
ING notes that the pound is not embedding any political risk at the moment. In theory, therefore, the currency could be vulnerable to the downside if markets start to see the recent developments as a net-negative factor for the currency.
Overall, however, ING rejects this possibility; “We doubt, however, this will be the case, and a new Prime Minister (Chancellor Rishi Sunak appears to be the front runner) may not automatically have any negative implications for the GBP outlook.”
The chances of UK PM Johnson resigning are rising, but the pound appears immune to political noise and might not suffer from a change of leadership in the country.
Brexit Talks Could Pose Greater Sterling Risks
Foreign Secretary Truss, who has also been tipped as a potential Conservative Party leadership contender, will hold talks with EU officials on Thursday to discuss the Northern Ireland protocol.
Ahead of the talks Truss commented; “There is a deal to be done but it will require a pragmatic approach from the EU.”
She added that she would put forward; “practical, reasonable solutions with a view to agreeing a plan for intensive negotiations.”
There is greater uncertainty over the direction of talks following the resignation of Brexit Minister Frost in December.
From a market perspective, the impact is likely to be limited unless the UK triggers Article 16 and suspends part of the protocol in which case the EU would quickly threaten retaliation.