Is pound biggest victim of Brexit game?

Boris Johnson is the top favorite to succeed Theresa May as Britain's prime minister. There is a good chance that the Brexit game will be played hard again next autumn, with the British pound in the victim role.

The elimination race in the battle for the succession of former Prime Minister May is in full swing. However, the total number kandidaten for the chairmanship of the Conservative Party was reduced from 1 to 10 in 2 week. For that selection, the 313 lower house members of the Conservative Party needed no less than 4 rounds of voting.

The battle is now between Boris Johnson and Jeremy Hunt. In the short term, the 160.000 members of the party will be allowed to vote and then around July 22 it will be announced who will lead the country out of the European Union. The latter is easier said than done, as evidenced by May over the past few years.

The favorite
Johnson is the towering favorite in the fight. That does not bode well for the British pound, however, as it is known as an outspoken supporter of Brexit. Even before the race, Johnson stated that he would leave the European Union on October 31 without an agreement. One of the few positive things you can say about May's reign is that she averted a no-deal disaster scenario.

If Johnson actually opts for a chaotic Brexit, the borders will close and the free movement of people and goods will come to a standstill. The Bank of England has already calculated that the pound could fall by 25%. However, even if he avoids a chaotic Brexit, the pound will face a wild ride under his rule. He chooses confrontation more often than he looks for agreement. His first opponent will probably be the European Union, with which he wants to reach a new agreement.

However, the European representatives do not miss an opportunity to emphasize that agreements have already been made and that they cannot be changed. The question is whether that is also necessary, because earlier this year Johnson already agreed to the agreement. His unpredictable nature will undoubtedly provide the necessary surprises (and therefore shocks for the pound).

Uncertain ride for the pound
Of course, it is not yet certain that Johnson will become the prime minister. After all, it wouldn't be the first time the underdog has taken off with the win; think, for example, of Donald Trump's unexpected election victory in the American presidential election. Immediately afterwards, the dollar took a hefty knock. However, the British pound would receive a boost in a surprising election result, as a chaotic Brexit seems further away.

Of course, when doing business in the UK, currency fluctuations are nothing new. Although the exchange rate between the pound and the euro is almost at the same level as last year, fluctuations of 5% within a few weeks were no exception. We will know in July whether this will remain the case in the future, or whether peace will finally return after a few turbulent years.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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