GBP: would a Boris Johnson win drive the pound lower?

Despite his absence, all signs point towards a victory for Boris Johnson in todays second round of voting. With the result of that second round expected at 6pm (UK time), the focus will swiftly shift to this evening’s BBC debate. Johnson will be attending this second event, and the cynics will be keeping an eye out for any gaffes which could derail his leadership bid. Nevertheless, despite his lack of involvement in this process this far, Johnson holds a seemingly unassailable lead over the competition. This process will ultimately push the final decision to the wider conservative membership, whose demographic breakdown makes them likely to be susceptible to a pro-Brexit narrative.

Markets have thus far seen the growing likeliness of a Boris Johnson government as being a negative for the pound. With expectations of a Johnson win, we have seen the value of sterling fall, dragging GBP/USD into the lowest level in more than five months this week. That fear centres around the possibility of a no-deal Brexit, with much of this post-referendum period seeing traders value the pound according to the possibility of such an outcome.

Renegotiation expectations low for divisive Boris

Some have been emboldened by Johnson’s claim that such an event would be undesirable and the last resort. However, his desire to find a new deal fails to face up to the fact that under UK Prime Minister Theresa May there seemed to be no route for finding any form of consensus that could see the UK leave with a deal. Any desire to renegotiate the withdrawal agreement were rebuffed, while meaningful votes to determine what type of Brexit would garner a majority fell short on every count. With Johnson widely heralded as one of the architects of the Brexit process, there is likely to be little appetite for providing any concessions to Johnson should he gain power. The Labour party knows that their best hope of forcing a general election would be to reject all forms of Brexit, citing red lines which are seemingly implemented to justify opposition at each turn. With little support both home and abroad, Johnson could easily be forced into a decision over whether to push through a no-deal Brexit, or call for the involvement of the people. With Johnson being appointed on a pro-Brexit ticket, there is little chance he would bring about a second referendum. Meanwhile, the prospect of giving Corbyn a chance to grab the reins at a general election would likely provide sufficient deterrence to ensure that they go ahead with a no-deal Brexit.

In the absence of Johnson essentially pushing through Theresa May’s widely rejected Brexit deal, the appointment of Johnson has a high likeliness of bringing about a cliff edge scenario. At that point we do not know if parliament could block a no-deal Brexit occurring, yet the possibility is certainly a key catalyst behind recent sterling weakness.

There is no guarantee that Johnson will take up the position at number ten, and with his hotly anticipated appearance this evening any shift in sentiment towards another candidate could bring about a rare upward move for the pound. However, in the event that Johnson does continue on this pathway towards Downing Street, then further downside does look likely for the pound.

Sterling declines to continue if Boris Johnson succeeds

The daily chart below highlights the recent breakdown below the $1.2559 swing low, continuing the downtrend that has been in play since the May peak. With the pair oversold, there is a chance that a weak showing from Johnson this evening could bring a short-term bounce. However, his ongoing success is likely to drive the pound lower, with the price heading towards a critical support level.

The weekly timeframe highlights that critical support level perfectly, with the decline towards $1.2435 pointing towards a possible wider breakdown coming into play here. The break through $1.3298 back in March signaled a potential bullish phase coming into play, yet with the current trajectory taking us towards that $1.2435 support level, we could see the wider 2018 bear trend come back into play. Below there, there are few support levels of note, with a break below the 76.4% Fibonacci retracement level at $1.2408 bringing about a chance that we head back towards the post-referendum low of $1.18.