A narrow win is not enough for Johnson

Despite all the media attention, the result of the British election is actually already certain: the Conservative Party of British Prime Minister Boris Johnson once again becomes the largest. Or is there more secretly going on than it seems?

Much is at stake in the UK election on Thursday 12 December. Will Brexit still be implemented within a few weeks, or will there be a second referendum? However, it must be very strange if Prime Minister Johnson's Conservatives do not emerge as the largest party. All polls show that the Conservative Party has a clear lead over Labour. Since Johnson took office in mid-July, that gap has only widened. With a rally of more than 11% in the past 4 months, the pound has taken a significant lead on a Conservative victory. However, a narrow victory is not enough.

Headache file
If Johnson is in charge, Britain will leave the European Union within a few weeks. However, the Brexit file is not yet closed. Johnson has agreed with government leaders in Europe that a trade agreement must be made before the end of 2020. Negotiators say that planning is too ambitious. Chances are, Johnson will have to ask for some extra time over the course of the next year, so that we'll once again find ourselves in a chess game of procrastination and uncertainty. If the Conservative Party does become the largest, but does not achieve an absolute majority, the doubts will arise much earlier and harder.

It will be difficult for Johnson to find a party that is willing to cooperate. This is partly because the Conservatives hard hit coalition partner DUP, when it looked earlier that they could push through Brexit. To stay in control, Johnson's party must therefore gain a majority in more than half of Britain's 650 constituencies. According to the polls, the prime minister gets about 43% of the vote. However, in 2015, David Cameron managed to win a majority of 36,1 seats with just 4% of the vote (in short: with the support of less than 10 out of 330 voters). It is to be hoped for Johnson that he also pulls off such a feat, otherwise the opposition could block all his proposals and he would become paralyzed.

Delete for disappointment
For the British pound (after the rebound in recent weeks) the best thing seems to be over. Earlier this week it was announced that the growth of the British economy has come to a halt between the beginning of August and the end of October. If Johnson does not obtain an absolute majority or if Labor wins, the economic picture will become even less beautiful. This will undoubtedly trigger an interest rate cut at the Bank of England, which makes the British pound less interesting. Even with a resounding victory by Johnson, there is little room for a relief rally after the increase in recent months. It seems only a matter of time before it becomes clear that a trade agreement before the end of next year is unfeasible. For the time being, 2020 does not seem to be the year of the pound.

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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