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Boris Johnson defeats push sterling above $1.23

By Michele Maatouk

Date: Thursday 05 Sep 2019

Boris Johnson defeats push sterling above $1.23

(Sharecast News) - Sterling gained ground on Thursday, ticking above the $1.23 mark as investors welcomed Prime Minister Boris Johnson's triple defeat in Parliament, although some analysts were sceptical the rally can continue.
At 1135 BST, the pound was up 0.6% against the dollar at 1.2330, having fallen below the $1.20 level earlier in the week for the first time since 2017. Against the euro, it was 0.5% higher at 1.1157.

Sterling got a lift after Johnson suffered a series of embarrassing defeats in parliament over votes to block a no-deal Brexit and an early election. The PM then suffered another humiliating blow as his brother Jo quit as Tory MP, saying he was "torn between family and national interest".

David Cheetham, chief market analyst at XTB, noted that the pound has now recouped around a quarter of the declines seen since the high at the start of May.

"The last couple of days since parliament returned from its summer recess have been dramatic, even against the high bar set by UK politics in recent years," he said.

"After making his move last week by proroguing parliament, Boris Johnson is now on the back foot once more after MPs have voted to pass a bill that essentially significantly reduces the threat of a no-deal Brexit and thus renders his negotiating position with the EU as far weaker - at least in his own eyes."

Analysts at UBS said that if Brexit is delayed until January, as it expects, sterling could rally above $1.30.

"A deal could even bring it to 1.35. For EURGBP, the respective levels would be 0.87 or even the lower 0.80s," they said. analyst Neil Wilson said that while the the passing of the bill and the disarray in government provides some "decent" support, this largely seems to be because shorts have decided to exit profitable positions.

"We should caution that no-deal risks remain high and this pantomime is far from over. A delay to January 31st, which is not guaranteed by any means, only puts off no-deal, it does not remove it from the table.

"The only certainty is that the pound is exposed to a significant amount of headline risk and volatility as markets react to the news flow. That said, the trend right now is positive."

Now that sterling has cleared the $1.23 level, bulls are looking to the mid-July support in the $1.2380 region next before a push to the previous swing highs at $1.2520, he said.

Some analysts were more sceptical, however, with ING not expecting sterling's current rebound to have legs. Analyst Petr Krpata said the outlook for the currency now depends largely on who wins a general election, if it occurs.

"So far, sterling has benefited from the mix of the success MPs have had in legislating against 'no-deal' Brexit and the stretched short GBP positioning. But with early elections looming, we expect the pound to soon re-start its weakening trend, given election uncertainty and the non-negligible risk of a 'no-deal' Brexit if the Conservative party win a parliamentary majority under prime minister Boris Johnson," he said.

"Recall the GBP price action earlier in the year. The pound initially strengthened on hopes of an Article 50 extension (as is happening now) but eventually depreciated meaningfully as UK politics became even more fragmented and the risk of a no-deal Brexit increased."

The bank expects a similar roadmap this time around and targets a level of 0.95 versus the euro and 1.17 against the dollar in the coming months, with the date of the early election determining the timing of the pound's decline.

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