(Bloomberg) --

Currency traders are starting to factor in a new trigger for the rally in the British pound: the possibility that Boris Johnson will step down.

Far from the eroding the gains that have made sterling one of the top performers versus the dollar this month, the prospect of the prime minister’s resignation could give the currency a further lift, according to some strategists. 

That comes against the backdrop of broadly improving sentiment on the pound as traders set their sights on a Bank of England tightening cycle and a potential shift to the endemic stage of Covid-19. 

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“A strong and stable leadership could set the pound on a better course, though we would have to get beyond any leadership shenanigans first,” said Jane Foley, a strategist at Rabobank in London. “Currencies tend to like strong leaders. The politics around Johnson right now are a distraction.”

Growing Calls

Johnson is facing growing calls to resign, both from within his own Conservative Party and among opponents, after he admitted attending a party in the gardens of No. 10 Downing Street during the first pandemic lockdown, effectively flouting the government’s own distancing rules.

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Yet that’s done little to take the edge off sterling. The pound is currently trading at its highest level versus the dollar since October as money markets bet the BOE will embark on its first series of interest-rate increases since 2017. It’s near a two-year high versus the euro, after appreciating 0.6% this year.

Political developments have been a key driver for sterling for much of the past decade, with a popular vote on Scottish independence in 2014 followed by another on Brexit two years later. The latter led to years of volatility amid negotiations with the European Union, and sterling is yet to recoup its pre-referendum strength. 

Stark Contrast

It’s a striking contrast with current sentiment, which has turned less bearish in the options market, according to short- and longer-term measures. Hedge funds and institutional asset managers alike are also scaling back wagers on the pound’s decline, after they ballooned in December to the most since at least August 2020. 

Johnson’s departure is still far from certain. Most Conservative lawmakers interviewed by Bloomberg said they would wait for the findings of a formal probe into the Downing Street party before deciding on next steps. It would take 54 of them, or 15% of the total, to trigger a vote on Johnson’s future.

“The pound is not embedding any political risk at the moment, which would in theory make it vulnerable to the downside if markets start to see the recent developments as a net-negative factor for the currency,” a team of strategists at ING Bank NV including London-based Francesco Pesole wrote in a note. “We doubt, however, this will be the case.”

The pound rose 0.3% to $1.3740 as of 10:46 a.m. in London on Thursday. It was 0.1% stronger than the euro at 83.41 pence. 

©2022 Bloomberg L.P.