Johnson in power: chance of no-deal rising

If it is up to new British Prime Minister Boris Johnson, his country will leave the European Union (EU) in October with or without good agreements. In the latter case, the British pound will be hit hard. But will Johnson be in charge?

On Tuesday, July 23, members of the Conservative Party named Boris Johnson as party leader and thus also as the new British Prime Minister. The currency world is sending a very clear signal what that means for the pound. The currency has fallen in value by about 5% against other major currencies in recent months. Against the US dollar, the pound reached its lowest level since early 2017. Slowly but surely, even the low of 1985 is approaching. At that time, 1 pound was worth just over 1 dollar. In comparison: just before the Brexit referendum in 2016, you still got more than $1,45 for a pound.

Great chance of no deal
The chance of a no-deal Brexit has increased further in recent weeks. In the mutual debates, both Johnson and his opponent Jeremy Hunt have emphasized that they have no sympathy for the agreement that former Prime Minister Theresa May concluded with the EU last year. The big stumbling block is the so-called Irish backstop.

Since it is impossible to hermetically close the 500 km long border between Ireland and Northern Ireland with almost 300 crossings, it has been agreed that a temporary backstop will be created with the British mainland in the Irish Sea. However, Johnson does not feel like that, since that would divide the country in two. Of course, his Conservative Party will not have a majority in the House of Commons without support from the Northern Ireland DUP.

Brexit swamp
The heads of government of the other EU countries have already indicated that Great Britain will have to make do with the agreement that is now in place. Johnson doesn't feel like that, just as he has no intention of drowning like his predecessor in a quagmire of new negotiations and unsuccessful voting rounds. A no-deal Brexit on October 31 is then the only remaining option.

Just before Johnson took the party leadership and premiership, however, it became clear that Johnson is not completely in control. In mid-July, an amendment was passed that the House of Commons must debate on the Northern Ireland issue in the week before the Brexit deadline. As a result, the Prime Minister does not have the opportunity to send the House of Commons home and push through a no-deal Brexit.

thwart Johnson
It is obvious that parliamentarians from different parties would join forces to thwart Johnson. The big question is what happens next. Will the deadline simply be pushed back again, will there be new elections or will the British be allowed to go to the polls again for another Brexit referendum?

For now, the first scenario is the most likely. Just before his victory, the EU has already indicated that it is ready to grant Johnson another postponement. If the whole Brexit circus starts all over again, everyone who does business across the border can already brace themselves for quite a few new pound shocks.

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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