The pound inched higher amid reports Boris Johnson could seek to keep Britain close to the EU for another two years if he became UK prime minister.
The second round of voting in the Tory leadership contest got underway on Tuesday, with the former London mayor and foreign secretary widely tipped for victory.
Sterling (GBPUSD=X) immediately edged up 0.1% in late afternoon trading against the dollar after a detailed account surfaced of Johnson’s meeting with business leaders today.
Johnson not only struck a far softer tone on Brexit than usual, but also reportedly proposed extending a transition period for the UK after the scheduled exit date of 31 October, according to the BBC.
Johnson apparently told corporate leaders his deeply controversial ‘F*** business’ comments were taken out of context.
If Johnson wins, adopts the proposal and EU leaders agree, it could see the UK remain closely aligned with the EU even after departure until December 2021.
He is reported to have told his audience he hoped such an extension could give time to resolve the Irish backstop issue, placing his hopes in a technological solution to prevent a politically toxic hard border.
Russ Mould, AJ Bell investment director, said: “After its latest mauling it may not take too much to give the pound a boost and talk that Boris Johnson is considering a two-year transition period to try and deal with the issue of the Irish backstop appears to be at least offering some support to sterling.”
A longer transition could allay some of the business fears about a radical rupture with Europe later this year, but it does not clarify the kind of relationship it would lead to from 2021.
“Transition to what, precisely? Talk of transition is quite premature,” said Michael Ingram, chief market strategist at WHIreland.
It could also spark a backlash among Leave supporters. The pro-Brexit Express newspaper has already dubbed the reported remarks a “shocking U-turn over his no deal Brexit pledge.”
Despite the slight rise, sterling is still trading not far from five-month lows against the dollar and the euro.
The lows reflect fears Johnson would take Britain out of the EU without a deal, as well as fears that Britain’s economy is already deterioriating and the US-China trade war could damage growth.
“It’s a very tentative sterling move,” said Ken Odeluga, a market analyst at City Index. He said the market “remains wary of his intentions,” with a growing sense Johnson may “present a slightly different face to each different constituency.”
Mold added: “The pound has tended to draw comfort from the prospect of a managed Brexit and recoil from a no-deal scenario, because economists and traders do not know what the latter could mean for the UK economy, be it good, bad or indifferent. By contrast, a managed exit would probably be more of a known quantity.”
He said that the candidates in the race may be becoming increasingly pragmatic as they edge closer to Number 10.
But Mold questioned whether Johnson would be able to get his plans through parliament, given the political deadlock and MP’s previous rejections of similar proposals in votes in the Commons. “There is still an awfully long way to go,” he noted.
Ingram said the pound’s movements on Tuesday could also be more about the dollar and the euro than the pound itself or Johnson’s comments, as investors react to an “increasingly dovish” European Central Bank and US Federal Reserve.