It has been suggested the PM may not depart until October
On July 7, Boris Johnson agreed to step down as Prime Minister once a successor has been agreed on.
It has been suggested that this could take until October, however the process may be faster, with Theresa May only occupying the top job for two months after she agreed to resign.
Once a Conservative leader stands down, an election for a new party leader is triggered. Under the current rules, candidates need the support of eight Conservative MPs to enter the race.
Mike Owens, global sales trader at Saxo Markets explained that, so far, GDP has increased 0.5% since the news broke on Boris Johnson’s resignation.
“Although predominately driven by the strong dollar, another less significant factor pushing the pound lower over recent weeks has been the political uncertainty, so I think we can expect to see some relief being priced into the UK currency as more details of Boris Johnson’s plan to step down are announced,” Owens added.
He outlined that financial markets prefer certainty, and said this situation is no different.
Read more: Boris Johnson to step down as Prime Minister
“The rise in the value of the pound is a back-handed compliment for the regime that will take the place of the Johnson Government,” said James Bentley, director of Financial Markets Online.
Bentley added that confidence had deserted the prime minister and the market was implying that what comes next can only be better.
He explained that sterling began to rise as soon as Boris Johnson indicated he would leave office but, as is so often the case, Bentley outlined that a little initial euphoria could give way to the more mundane, cold, hard realities of the current economic malaise, which could let a little air out of the balloon.
“One such scenario would be if he is allowed to cling on in the interim until the Conservative Party conference,” Bentley added.
“The benefit of the doubt resigned long ago, even if he did not,” he added.
Read more: ONS: All headline sectors made negative GDP contribution in three months to April
Giles Coghlan, chief analyst at HYCM went on to say that after another tumultuous few days in British politics and a string of high-profile resignations, news of Boris Johnson’s resignation may spell some good news for FX markets.
Although there have been no structural changes to the UK economic backdrop to date, Coghlan said markets have seen the pound strengthen against the euro and the dollar, with gains for UK stocks.
Coghlan believes this is likely to be based on the assumption that Boris Johnson’s replacement may restore Conservative party unity and provide the economy with a much-needed fiscal uplift.
“Now, the markets will be asking the question ‘after Boris, who?’. While Rishi Sunak, Dominic Raab and Penny Mordaunt are front-runners at the moment, a clear replacement remains uncertain,” he added.
In terms of significant GBP moves, Coghlan explained the main risk for substantial GBP falls would come from the prospect of a General Election.
“If markets sense that a General Election may be coming, this could send the GBP sharply lower on uncertainty,” he said.
In any case, Coghlan explained investors will be watching the markets closely in the coming days in the hope that the next Prime Minister will provide effective leadership as the economic backdrop remains bleak.
“The Bank of England will factor the current political instability into its decision-making, however it is unlikely to change its tactics to bring inflation under control, given that the current situation is unlikely to lead to a public vote right now,” he concluded.
