What Boris Johnson’s resignation means for the British pound

After trending lower for over a year, cable moved a little higher following the announcement of PM Johnson's resignation. Was that a coincidence or the sign of a new trend?

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What's moving the markets

Just days after surviving a no-confidence vote, Johnson had to face another political scandal and the resignation of several cabinet members. As the political situation dragged on, and Johnson tried to keep hold of his premiership, the markets reacted negatively to the uncertainty. Johnson's announcement of stepping down as party leader but staying on as PM until a new leader is decided helped reduce some of that uncertainty.

However, now there is a leadership battle within the ruling Conservative party, and that could keep traders on their toes. Particularly considering that a change in PM usually includes calling a General Election soon thereafter to legitimize their premiership. Until Johnson's resignation, it seemed most likely there wouldn't be a General Election until early 2025. Depending on what happens over the coming months, and how the polls evolve, there could be one next year.

Where things could be headed

One of the major problems likely to be faced by the new Prime Minister is that Johnson's resignation is unlikely to change things. A lot was made out of the Partygate scandal, and he ultimately resigned over Pincher's appointment. But the general public doesn't appear to care about these issues nearly as much as the politicians.

Inflation and a looming economic slowdown remain a major problem and something that Britons care much more about. One of the potential replacements for Johnson is former Chancellor Rishi Sunak who already had to deal with this problem. And his solution was to increase government spending, making the BOE's job of getting inflation under control more difficult.

It would appear so far that the other potential Tory leader candidates don't differ much in their economic views. So, the leadership debate might lead to some volatility that could trouble market participants, but the reality is that the economic situation and outlook remain virtually identical.

GBP/USD below trendline resistance

The British pound retested the $1.1958 low of Aug 31st ’19 last week, and it’s on course to validate a breakdown should it remain below the round level of $1.20. Price action remains bearish under the $1.4376-$1.3515 trendline extension at $1.2155..

A weekly or several daily closes below $1.1958, could see the currency decelerate further. Two support levels lie at the $1.14 low, with the interims being the weekly close and open of $1.1560 and $1.1650.

Source: Spreadex trading platform

Key takeaways

Despite Johnson's resignation reducing some of the uncertainty in UK politics, a new leadership battle will keep cable volatile. The new Prime Minister is unlikely to change much of the economic status quo either, offering no mitigation of the effects of inflation and looming economic slowdown.