Johnson's Win Signals Ongoing Pound Sterling Undervaluation against Euro and Dollar says Analyst

• GBP softer in wake of Johnson win
• Promising 'more of the same' for the UK economy
• But softer global markets also likely weighing

Above: File image of Prime Minister Johnson, by Andrew Parsons / No 10 Downing Street.

The British Pound will remain undervalued for the foreseeable future, undermined by a "low wattage" economy and the ongoing threat of a trade dispute with the EU says an economist in light of Prime Minister Boris Johnson's recent confidence vote.

Johnson won a confidence vote held by Conservative MPs by 211 to 148 retain his position as Prime Minister on Monday night.

He described the outcome as "very good" and "convincing".

But the Pound didn't agree as it lost ground against the Euro, Dollar and other majors on the news.

"The risk of a worsening economy over the summer, as well as bad results in upcoming by-elections such as in West Yorkshire and Devon on around 23 June could swing the pendulum against Johnson yet," says Kallum Pickering, Senior Economist at Berenberg Bank in London, adding that under Johnson's current policies the economy and Pound are unlikely to thrive.

The UK currency had rallied on the news of the confidence vote on Monday, with some currency analysts saying the gains were indeed linked to the prospects of a new leader although others said the outcome was of little consequence for markets.

Responding to news of a confidence vote, Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics said the Pound was in fact benefiting from the prospect of change.

"At the margin, markets have responded favourably to the news of the contest, with sterling appreciating to $1.257, from $1.250 earlier this morning. This appears to reflect the general principle that markets favour Conservative governments, and the chances of the Tories winning the next election likely will be higher under a new leader," he said in a note to clients.

Therefore news of Johnson's win is potentially a net negative for Pound exchange rates.

Pickering says there is certainly something for the Pound in the outcome of the vote.

He says Johnson will continue to "preside over a low wattage mostly-centrist agenda involving rising government spending (largely matched by rising taxes) as a percent of GDP, piecemeal efforts to ease regulations and ‘big-talk-small-action’ public investment."

The Pound to Euro exchange rate rose to as high as 1.1728 on Monday but is back to 1.1668 on Tuesday. The Pound to Dollar exchange rate had been as high as 1.2576 ahead of the vote but is back down to 1.2457. (Set your FX rate alert here).

"On trade matters, Johnson would continue to seek new deals and expand existing ones. However, this would not compensate for the continued noisy relations with the UK’s most important partner, the EU. Altogether, this would make for continued middling economic performance for the UK among major advanced economies," says Pickering.

Addressing Conservative MPs on Monday Johnson committed to cutting taxes in the future, but for now UK businesses and citizens remain shackled by the highest tax burden since the 1940s.

Above: GBP/EUR at 15 minute intervals.

Johnson will meanwhile likely pursue changes to the Northern Ireland protocol in order to convince Unionists in Belfast to form a government with Sinn Fein.

But this risks raising tensions with the EU.

"Sterling and some other UK risk assets would remain undervalued relative to fundamentals due to the continued risk that UK-EU tensions could boil over and trigger a trade war that would disproportionally hurt the smaller UK," says Pickering.

Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown says the Pound has edged lower in the wake of the confidence votee, heading back towards two-year lows against the U.S. Dollar.

"There is speculation that the result could end up weakening the economy further if the Prime Minister takes measures to boost his political standing among the party," she says. "This could include a tougher stance towards the EU in terms of trade and the Northern Ireland protocol, and by cutting taxes which could add to inflation by supporting demand in the economy for longer. This could pile more pressure on the Bank of England to raise interest rates more steeply".

Looking ahead, the Pound will likely react to global market sentiment given a lack of UK data releases this week.

The Pound is a pro-cyclical and pro-risk currency that tends to advance against the Dollar and Euro when market sentiment is positive, but fall when the opposite is true.

Markets are trading softer at the time of writing on Tuesday amidst the usual set of worries: elevated oil prices, war in Ukraine and fears of higher global interest rates. Although these issues are not new to investors they will ensure markets remain jittery for some time yet.

In such an uncertain environment the Dollar would typically be expected to find support while Sterling and the Euro would be expected to see rallies faded.

"Choppy price action continues to dominate markets as investors weigh the impact of central bank policy tightening on inflation and economic growth. While some indices have bounced off their lows again, the overall price action continues to remain choppy and inside larger downward trends for many. We are still in a bear market and with central banks ending QE and reducing their balance sheets, the good days of the stock markets may well be behind us," says Fawad Razaqzada, Market Analyst at City Index.