LONDON: The British pound rose on Monday against the dollar and the euro, hours before Prime Minister Boris Johnson was due to face a confidence vote called by members of his Conservative Party.
Johnson was expected to survive the vote, called after a growing number of lawmakers in the governing Conservative Party questioned the British leader’s flagging authority over the “partygate” scandal, which led to police fines for Downing Street gatherings that broke COVID-19 lockdown rules.
Sterling clung to the gains even after the dollar index swung positive, having been as much as 0.2% lower earlier in the day. By 1506 GMT, sterling was 0.4% higher to the dollar at $1.25690, having earlier risen as high as $1.2577.
It extended gains against the euro and was up 0.57% to 85.360 pence.
Many analysts saw the confidence vote as potentially pound-positive, if it drew a line under partygate, and eased uncertainty over Johnson’s threats to scrap post-Brexit agreements regulating goods shipments from mainland Britain to Northern Ireland.
It may also pave the way for a different leader eventually.
Stephen Gallo, European head of FX strategy at BMO Capital Markets, said “a Tory leadership change would eliminate (Johnson) as a liability factor for the Tories, reduce the likelihood of a second Scottish independence referendum in 2023, and possibly lead to...higher public sector investment in the economy over the tax and spend approach”.
The pound has been under pressure this year, having just wrapped up five straight months of losses, weighed down by Britain’s dismal growth outlook that is casting doubt on the Bank of England’s rate-hike trajectory.
ING Bank analysts noted the pound had been unreactive when the partygate scandal first exploded and even the prospect of a leadership change may not have many implications policy-wise.
They told clients that they saw the pound as vulnerable in the short term, given worsening growth prospects and a potential re-pricing of BoE rate expectations, adding that a fall below $1.25 could open the way for a decline to $1.2300-$1.2350.
Vasileios Gkionakis, head of currency strategy at Citi, said UK fiscal policy had been less forceful than needed to cushion the blow from higher energy prices.
“The market may be pricing the possibility that if Johnson is removed as the leader, then we may have a shift in UK policy especially in what concerns the fiscal stance.”
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