GBP/USD: Fiscal policy and Brexit matter more than politics – HSBC

Boris Johnson has resigned as Tory leader but will remain UK Prime Minister until a new leader is chosen. The pound did not react much to Mr Johnson’s resignation. Looking through headline noise and short-term volatility, economists at HSBC believe fiscal policy and Brexit matter more for the GBP.

Policies matter more than politics

“UK political volatility appears to have overtaken GBP volatility in recent days, with the GBP not reacting much to Mr Johnson’s resignation. Looking through any potential headline noise and short-term volatility, there is unlikely to be a meaningful trend impact on the GBP unless we see a big shift in underlying policy under a new leader, or indeed under a new government if there is an early election.”

“Fiscal policy has been reined in somewhat following the big stimulus delivered during the COVID-19 crisis. In our view, a looser fiscal policy that helps to boost growth and possibly to ease the burden on households might help the GBP, particularly if it could be met by a more hawkish Bank of England.”

“On Brexit, any signs that a new leader or government is taking a more collaborative approach with the EU might also support the GBP. This would help to lower the tail risk of a breakdown in the UK-EU relationship over Northern Ireland, and lower the possibility that the UK might face even greater barriers to trade – such as new tariffs – with the EU.”