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Currency Corner: what does Boris Johnson’s pending victory mean for the pound?

Boris Johnson looks almost certain to be our next prime minister. Dominic Frisby looks at what that might mean for the pound.

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© 2019 Bloomberg Finance LP

Just before we get started today, I took part in a webinar last week with Alex Edwards of currency specialist OFX, and MoneyWeek's John Stepek we enjoyed a wide-ranging discussion about global trade, Brexit, and the effect on the foreign exchange markets. You can watch the whole hour free here.

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So, yesterday we discovered that Boris Johnson will be the next prime minister of the United Kingdom.

You may disagree, of course. You may think it will be Michael Gove or Jeremy Hunt or Dominic Raab. You might not want it to be Boris Johnson you might prefer Jeremy Corbyn or Nigel Farage.

No matter. All we care about here is forex (foreign exchange). And the forex markets do not have such principles or feelings. They are far more ruthless.

Let me explain why I think Johnson has got the gig.

The biggest obstacle between Johnson and Number 10 Downing Street has always been other Tory MPs. He has been the runaway favourite with the Conservative membership for years. But he has never been as popular with his fellow MPs as he is either with the public or the membership, and that has prevented him from getting anywhere.

But Johnson has now overcome that problem. He won the votes of 114 of his fellow MPs yesterday, 71 more than his closest rival. In doing so he crossed the magic threshold of 105, and is now all but guaranteed to be one of the final two candidates to be presented to Conservative members.

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He does not need to win any more votes just to make sure he does not lose any of the votes he has already won. But the mathematics of more votes coming available as contenders drop out means the probability is that 114 figure will increase.

Once it goes to the membership, Johnson will win. The members have already made it clear they will chose him. Barring some kind of major upset, this contest is done.

So how did the forex markets react?

With a great big "meh" is the answer.

Just another day at the office

As far as the forex markets are concerned, yesterday was a day like any other. In fact, a duller day than usual at the office. At 5pm, the pound had fallen by 0.08% against the dollar, and risen by 0.02% against the euro.

As currency is the issuance of a government, politics can affect currencies. You could infer that a Johnson win was already priced in; you could infer that the currency markets do not think this leadership contest is as done and dusted as I do; or you could infer that the currency markets haven't reacted because a new leader of the Conservative Party does not change anything the same Brexit impasse that there was before has not gone away.

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The EU has said it will not renegotiate. Parliament will not allow no deal. Something will have to give, or Brexit will not happen by 31 October. My bet is that something along the lines of the original Brexit deal negotiated by David Davis and Steve Baker will get through but we are still a way from that.

There could just as easily be a vote of no confidence, then a general election, with the Brexit Party splitting the vote to allow a Labour win. (For more on what that might mean for UK businesses, by the way, check out this article on the implications of a Corbyn government, put together in association with OFX.)

Over the past week or so, the declines in sterling that we saw through the month of May against the dollar and the euro have steadied.

For now, the range against the dollar is roughly $1.26 to $1.34. And we are close to the bottom of the range. Against the euro, the range is €1.12 to €1.18. We are at the bottom of that range, too.

Does that mean it's time to buy sterling?

Perhaps the answer to that lies in the competence which you ascribe to our next prime minister.

Is Johnson a bumbling buffoon who has only got where he is through sheer good fortune? Or is a highly competent operator whose idiocy is more savant than stupid?

Perhaps he is a bit of both. The big question is can he negotiate Britain out of its political quagmire?

If you think the answer is yes, perhaps it's time to buy sterling.

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