The GBP/USD pair plummeted by 35 pips on Tuesday, ending up at 1.2435 mark by the end of the trading session. As expected, Boris Johnson was elected as head of Britain’s conservative party and hence the country’s new prime minister. The numbers in his favor were pretty impressive - 92,513 (87.4%) votes against 46,656 votes for his opponent, J. Hunt.
It is worth noting that market participants reacted to Johnson's victory rather negatively, which resulted not only in the pound’s decline but also affected the national stock market, which also ended up in the red a day ago. Market pessimism is explained by the fact that Boris Johnson is primarily known as a hard-line supporter of Brexit. His election increases the likelihood that England will leave the EU without maintaining access to the single market and the European Customs Union. Speaking to lawmakers, the new Prime Minister Johnson assured that Britain would be out of the EU by October 31. Immediately after that, the media reported the Labor party leader Jeremy Corbyn would table a motion of no confidence in the government. Of course, there is almost zero probability that Corbyn’s motion would pass, which is logical - Johnson hasn’t spent a day in his new position as a prime minister. However, the existence of such opposition Johnson’s plans from the very beginning only exacerbates political instability in the UK.
We believe that GBP/USD has little reason to resume its growth. It will most likely keep consolidating below the 1.25 handle. Even if the price attempts to test of this barrier, the bears will still keep their long-term dominance. Let’s keep in mind, that sterling is now under intense pressure after the resignations of a number of key ministers who disagree with the political course of the new leader, not to mention the risk of a hard Brexit in general. The pair’s growth is hindered by the strengthening of the dollar as well. USD was backed by the revised expectations of Fed's hawkish stance and its interest rate decision next week.
Let’s not forget about the UK’s prospects of monetary policy softening, especially in light of the continuing deterioration of the global economic environment. The Fed, the RBA, the RBNZ and the ECB did not just take the path of consistent interest rate reductions. They are united by a common goal - to prevent global economic slowdown and low inflation. Political uncertainty in England piles up the pressure on GBP. Some believe that the hard Brexit will trigger a decline in the UK GDP by more than 3%, which will immediately submerge the country’s economy in a protracted recession. If Britain leaves the EU without a deal, the government’s annual borrowing needs will increase by 30 billion pounds in the period from 2020 to 2021, and the net debt will grow by 12% by 2023–24. In this scenario, the GBP/USD pair will plummet to parity. That’s what we suggest betting on.