It has now been just over a year since Boris Johnson won a decisive election victory and took the reins of power in the UK. With his win came a decisive end to the political impasse which had paralysed the House of Commons for months, and the period of indecision and infighting which had characterised Theresa May’s premiership. However, since Mr Johnson moved into No. 10 it has been far from plain sailing, with the country wracked by Brexit convulsions and slammed by Covid-19 – even seeing the PM himself end up in intensive care.
Over the same period, it has been a similarly rocky ride for the Pound, with the British currency displaying volatile behaviour and sinking to 30-year lows at one point. Immediately after the election results were announced – which saw Mr Johnson’s Conservative Party win with a crushing majority of 80 seats – the Pound strengthened around 2 percent against the US Dollar to $1.35. The currency had already been rising steadily for weeks on speculation about the result, with markets clearly hoping that Brexit related confusion would be dispelled. What’s more, Mr Johnson had promised to bring an end to the belt-tightening austerity measures which had been in place for years, and inject billions of fresh money into public services, thus bringing a growth boost back to the UK economy.
Within hours of taking power, Mr Johnson caused an immediate slump in the value of the Pound by laying down a hard deadline of December 31 for a trade deal with the EU to be completed. What’s more, he indicated that he wasn’t scared to initiate a no-deal Brexit if nothing could be agreed. Within days the Pound had lost 3 percent of its value, setting Mr Johnson’s premiership off to a wobbly start.
There was worse to come in August when – due to lingering political hostilities over Brexit – Johnson prorogued the UK Parliament, effectively shutting it down for several weeks. This unorthodox move was criticised as being unconstitutional, as it meant there could be no further scrutiny of the government’s Brexit plans. Despite this controversy, Sterling began to slowly recover over the next three months, rising to $1.24 by October 10, before suddenly jumping up to $1.30 within a week.
The cause of this sudden jump in Sterling? Investors had become convinced that a deal between the UK and the EU would be imminently struck, catapulting the Pound to a four-month high. By October 19 the GBP/USD exchange rate was back at $1.30, while against the Euro GBP/EUR had hit €1.16. “Brexit Day” on January 31 – the day when the UK officially entered into a transition period of leaving the EU – came and went without much fanfare and the UK currency rode high on this plateau for the next five months … but it wasn’t to last.
By February there were ominous rumblings about a mysterious virus hitting China. Most analysts dismissed it as nothing to worry about, but other were concerned that it could spread, potentially slamming global trade and hitting economies hard. Alas, it was the latter group that was proved right. By March the Covid-19 virus was spreading rapidly around the globe leading some countries to enforce economic shutdowns and restrict the movement of citizens.
Immediately, all the talk in the Forex markets was about risk and how to avoid it. Panicky traders sold their Pounds and bought US Dollars as the virus tightened its grip. Central banks around the world jumped into action, slashing interest rates and flooding markets with stimulus money to keep economies afloat. Boris Johnson, describing the crisis as “the worst in a generation” attempted to talk up the British currency, but his efforts were to no avail within days GBP/USD had fallen from $1.31 down to $1.15 – its lowest level in 30 years. By March 23 the whole of the UK was placed under lockdown measures, with many businesses shuttering and nearly every economic indicator falling off a cliff.
There was worse to come for Mr Johnson, who himself was admitted to hospital with Covid-19 in early April, and soon ended up in intensive care. With the PM’s very life in the balance traders waited with bated breath for what would come next. By now the Pound had recovered to around $1.25 and €1.14, and news that Mr Johnson was on the mend saw it stay at this level. By April 10 it seemed that the number of new coronavirus cases was levelling off and falling, something that kept the Pound elevated.
Since April this year we have seen an unusual thing happening with the strength of the Pound compared to its two main rivals. Against the US Dollar it has been slowly but surely appreciating, while against the Euro the opposite has been observed. The reason for this is that the Dollar has been weakening on world markets due to a combination of factors, including political turmoil, more coronavirus cases in the US, and a perception that the level of risk in currency markets is falling.
On the other hand, the Euro has been strengthening as the European Central Bank announced a huge stimulus package of €750 billion to help member states repair their economies from the damage caused by the Covid-19 shutdowns. This has seen the Pound fall to a level of €1.11 in recent days.
It has been a tumultuous first year in power for Boris Johnson, with his tough Brexit stance and the damage from the coronavirus lockdown seeing the Pound buffeted around. The focus now is on avoiding a second wave of the virus this winter, and on rebuilding the economy even in the face of a potential no-deal split from the EU.
The current feeling is that Johnson’s handling of the crisis, while coming in for criticism, could have been worse. However, the Pound’s newfound relative strength could evaporate if Brexit negotiations were to break down even further or if there is a second virus wave. Nevertheless, the expectation for now is that there will be an economic rebound over the second half of the year which – if it happens – should lend support to the Pound going into 2021.
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