- The British pound rallied on Monday despite an imminent no-confidence vote in Boris Johnson later in the day.
- Sterling gained 0.5% against the dollar and 0.6% against the euro on Monday.
- Analysts predict the pound will fall if Johnson loses the UK Parliament vote.
The pound rallied across the board on Monday, appearing to shake off political unrest as Prime Minister Boris Johnson faced a no-confidence vote later in the day.
At least 54 Conservative members of Johnson’s own party filed secret letters of no-confidence that sparked the vote in his leadership.
“The threshold of 15 percent of parliamentary parties seeking a vote of confidence in the Conservative Party leader has been crossed,” Graham Brady, the senior Conservative backbencher overseeing the process, said in a statement.
It comes before controversial plans to send asylum seekers to Rwanda and the so-called Partygate scandal, in which Johnson and political figures around him broke rules to hold parties amid Britain’s coronavirus lockdowns.
In terms of what the vote could mean for the pound, Giles Coghlan, chief analyst at HYCM, told Insider, “If Johnson is removed, investors can expect the pound to fall initially with no clear replacement for PM in the market.” Sense is if a named replacement character looks positively received, we could potentially see the pound whip.
As of 10:31 am ET, sterling was up 0.4% against the dollar to $1.253 and up 0.5% against the euro to 85.31 pence. But the pound was still close to its weakest in a month against the single European currency.
Rabobank analysts echoed sterling’s broader weakness against the euro, saying: “EURGBP has never returned to pre-Brexit referendum levels and sterling’s weakening since mid-2016 is consistent with weak investment data over the period.”
Other analysts were similarly bearish on sterling’s longer-term prospects.
“The pound remains vulnerable in the near term amid deteriorating growth prospects and a possible reassessment of BoE interest rate expectations,” strategists at ING said.
As the UK faces its worst inflation in 30 years, the Bank of England raised interest rates by 25 basis points to 1% last month. The country’s central bank forecast inflation will rise above 10% in October while warning the UK economy could collapse
The bleak outlook brings together a perfect storm, including blistering inflation, economic disruption from COVID-19 and Brexit, all of which brought the UK economy to a near halt in the first quarter of this year, growing just 0.8% year-on-year from the previous quarter, when GDP grew by 1.3%.
Analysts at Rabobank reiterated a bearish outlook for the pound, saying: “To the extent that the UK runs a current account deficit, the GBP is likely to be more sensitive to a perceived deterioration in economic fundamentals than it would otherwise be.”
Viraj Patel, FX & Global Macro Strategist at Vanda Research, said he was generally optimistic on the pound but cautioned that the currency looks vulnerable amid the vote of confidence.
“Boris Johnson’s no-confidence vote should be a non-event for $GBP markets. It only becomes a problem if the risks of a snap general election increase. This would set $GBP on a slippery slope up to 1.20. But given the poll, the likelihood of a Tory leader calling snap elections is slim,” he said in a tweet.