On Thursday, Sterling was holding onto its gains, after British Prime Minister Boris Johnson announced that he was quitting, after a series of resignations from ministers and increasing calls for him to step down.
The British currency had begun to rise against the euro and the US dollar earlier in the day, after reports of the prime minister’s imminent resignation. However, the moves remained fairly small, as markets had mostly priced in Johnson’s departure before it happened.
The reaction of UK assets to the declining fortunes of the British prime minister had mostly been calm this week. This was because markets were more focused on the deteriorating global outlook, even if some political uncertainty had been eliminated.
The sterling was trading at $1.993 against the US dollar by 1500 GMT, which was an increase of 0.6% for the day. However, before Johnson’s resignation announcement, the currency had climbed to a high of $1.2024. On Wednesday, the British currency had fallen to $1.1877, which is its lowest value since March 2020.
Against the euro, the British pound managed to extend an earlier increase to reach 84.75 pence after the announcement. This was a rise of 0.7% for the day and the highest the currency has been since May 23rd.
Market analysts said that some of the market sentiment was that of relief that the scandals that had been plaguing the markets for the past year would finally be over. However, they added that there was still uncertainty because there were no clear signs as to who would replace the prime minister.
This week, the British currency had fallen to its lowest value in two years against the US dollar. But, analysts have said that the political turmoil in Westminster was not the only reason for the selling, as concerns regarding the global economic health, including that of Britain, were the reason for more immediate pressure.
The analysts added that the British pound was still vulnerable as the growth outlook remained grim. Furthermore, the Bank of England (BoE) is also under pressure and the next couple of quarters could result in a recession.
Sterling has done much better against the euro. Concerns about an economic recession and the economic impact of surging gas prices have hammered the single currency.
Impact of departure
UK stocks climbed on Thursday, in accordance with international gains. There was also a rise in British government bond yields, particularly short-term ones, which also corresponded with increases in US and eurozone debt yields.
According to some analysts, there could be an increase in public spending after Johnson’s departure, as a new premier may leverage populist measures to shoring up support. This may give UK assets a short-term boost but could drive inflationary pressures up. This is because the decades-high inflation is putting more pressure on the British economy, as compared to that of other developed countries.
A new leader has to be elected by the Conservative party, a process that could take weeks or even months.