Currencies

Sterling tentatively shrugs off UK leader Boris Johnson's admission to intensive care

Key Points
  • The news of the prime minister's deteriorating condition on Monday night could reasonably have been expected to weigh on the pound, but sterling has been buoyed slightly by a broad U.S. dollar pullback.
  • Foreign Secretary Dominic Raab is currently deputizing as prime minister in Boris Johnson's absence.
Members of the news media gather outside St Thomas' Hospital in London on April 6, 2020.
TOLGA AKMEN | AFP | Getty Images

Sterling gained on Tuesday morning despite the U.K. Prime Minister Boris Johnson's admission to an intensive care unit due to worsening coronavirus symptoms.

By mid-afternoon in the European trading session, the pound was up 1% against the dollar, having jumped after Downing Street struck a positive tone over Johnson's condition.

"The Prime Minister has been stable overnight and remains in good spirits. He is receiving standard oxygen treatment and breathing without any other assistance. He has not required mechanical ventilation or non-invasive respiratory support," a spokesman said Tuesday.

The news of the prime minister's deteriorating condition on Monday night could reasonably have been expected to weigh on the pound, but sterling has been buoyed slightly by a broad U.S. dollar pullback following its historic rally during the coronavirus pandemic.

"If the ship doesn't have a captain, it's not something the FX market will like very much, so the news about the PM is certainly not bullish for the GBP," Stephen Gallo, European head of foreign exchange strategy at BMO Capital Markets, said in a memo seen by CNBC Tuesday morning.

"But it's far too early to know what a change in leadership in the U.K. will mean for economic and trade policy, Brexit, and the overwhelming political dynamic."

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Gallo also highlighted that the government maintains a stable majority and can continue to enact its agenda, with elections not due for at least another four years. Foreign Secretary Dominic Raab is currently deputizing as prime minister in Johnson's absence.

The most significant currency moves arising from the COVID-19 pandemic, most notably the big dollar rally as investors flocked to the world's most liquid currency in recent weeks, have already occurred, Gallo suggested, which is why cable is trading as it is.

"There may be more volatility to come in FX before this pandemic is behind us, however long that takes," he said in the memo.

"But once you get into the realm in which you are forced to diagnose longer term issues as opposed to reacting to short-term shocks, you usually start to see volatility in exchange rates compress, which is what is now starting to occur."

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Three-month implied volatility for GBP/USD, the market's estimate of how much the currency pair will fluctuate over a certain period in the future, currently sits at 11.76, and Gallo suggested this could go slightly lower in the short term, notwithstanding another possible spike in volatility further ahead.

"So I don't expect that there will be a big move in GBP based solely off what becomes of the U.K.'s PM," he said.

"The longer-term implications of this are still very difficult to fully dissect, and basically unknowable."