Published: 08/07/2022 By ECAPBoris Johnson’s resignation as UK Prime Minister provided room for a modest rally in the pound yesterday, with attention in markets quickly turning to who could replace to outgoing Tory leader as the next PM. As had become increasingly inevitable in the 24 hours or so prior to yesterday’s announcement, Johnson officially stood down as Prime Minister just after midday. Sterling responded to the news in a positive fashion, and actually posted modest gains against its major peers in response to the initial headlines. Markets were already fully expecting him to go, but news of his resignation, and the avoidance of a likely messy and potentially ugly removal from office, gave the pound a leg up, albeit only a fairly modest one. By the end of the London session, sterling was trading just above the 1.20 handle on the US dollar, and at its strongest position versus the broadly weaker euro since 23rd May.
At present, there is no clear candidate to replace Johnson, with bookmakers fairly evenly torn between half a dozen or more candidates. It remains unclear whether a temporary appointment will be made, or if the Tory Party will allow Johnson to remain in charge until his successor is chosen later in the summer. Markets hate uncertainty and will be hoping for clarity and a swift resolution that will avoid a leadership contest that drags on for weeks or months.
Elsewhere, the euro broke to fresh two decade lows against the US dollar during yesterdays trading. Attention in markets turned to the European Central Bank’s response to the recent sell-off in the euro. A weaker common currency has inflationary implications, and would likely be something that the Governing Council would wish to avoid. While this could entice policymakers to raise interest rates more aggressively than expected in H2, the fragile growth outlook in the bloc, not to mention the increase in peripheral bond yields, puts the ECB in a very difficult spot. We may find out more from ECB President Lagarde later today, who is set to speak at around midday UK time.