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The possibility of Johnson resigning could strengthen the pound

Foreign exchange traders are beginning to look at a new factor in the British pound rally: the possibility of Boris Johnson resigning, Bloomberg reports.

Instead of wiping out gains that led to the pound among the best-performing currencies against the dollar this month, the prospect of the British prime minister’s resignation could give the currency a further boost, according to some analysts.

This comes against the backdrop of the significantly improved climate for the pound, as traders turn their attention to the Bank of England tightening cycle and a possible shift to the final stage of the Covid-19 pandemic.

“A strong and stable leadership could lead the pound to a better trajectory, although we must first overcome the electoral strategy,” said Jane Foley, Rabobank’s strategist in London. “Coins tend to like strong leaders. The political situation around Johnson at the moment is a distraction.”

Johnson is facing increasing demands for his resignation, both from the Conservative Party and from his opponents, after admitting that he attended a party in the prime minister’s garden during the first lockdown, effectively violating the government directives on distances.

However, this had little impact on the pound. The British currency has been trading at its highest level against the dollar since October as markets bet that the Bank of England will soon launch the first round of interest rate hikes since 2017. At the same time, the currency is at a two-year high against the euro, after rising 0.6% this year.

Political developments have been the driving force behind the pound for most of the past decade, with the Scottish independence referendum in 2014 and just two years later the Brexit referendum. The latter has led to years of high volatility in the midst of negotiations with the European Union, while the pound has not yet managed to return to pre-referendum levels.

Bloomberg notes, however, that it is not at all certain how Johnson will resign. Most Conservative MPs contacted by Bloomberg said they would wait for the results of the official inquiry into the party at the prime minister’s residence before deciding what their next steps would be. It will take 54 lawmakers, or 15% of the total, a vote on Johnson’s future.

“The pound does not pose a political risk at the moment, which in theory makes it vulnerable to downside risks if markets start to see the latest developments as a negative factor for the currency,” said analysts at ING Bank NV. “However, we doubt that this will be the case.”

The pound strengthened 0.3% to $ 1.3740 on Thursday, while against the euro it gained 0.1% to 83.41 pence.

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