We’ve written about this before. It’s all about Boris Johnson and his mad desire for power, but the market listens to his stump speeches on how he is going to deliver Brexit and by-pass Parliament in the name of democracy, and traders hit the sell button on their GBP positions. As we wait with baited breath for the outcome of the Tory leadership contest, here are five things to consider BEFORE you line up on the side of sterling:
Tougher stance from Johnson and Hunt
The rhetoric from both Tory party candidates – Boris Johnson and Jeremy Hunt – is clearly weighing on the pound. The markets don’t seem to feel they are bluffing. The dollar may be rising too, but we can see evidence of traders selling GBP and buying EUR. This is mainly about the prospect of a no-deal Brexit and the clear scenario for the damage that will do to the UK economy.
Good chance support levels will be obliterated
Analysts have been looking for a number of support levels for the GBP vs USD as it blows past lows not seen since the 2017 flash crash. At the time of writing sterling was trading at 1.24186. Traders are looking out to see whether the pound will breach the key 1.24 level, as this could leave it open to further selling, heading down to 1.236. Analysts seem unconvinced that such a level will hold in the event of a further sell off tomorrow, and we could see the currency dropping to 1.22 before the end of the week. Basically, there is no confidence in historic support levels.
A complete lack of fundamental support
Brexit debates aside, the economic numbers are not looking good either. Some of this has to be attributed to Brexit, or the prospect of it at least. Despite previous solid retail numbers last month and stronger wage growth, the UK’s economic growth is nothing special. The Bank of England is also more likely to cut interest rates than raise them going forwards, leaving investors with even less reason to buy sterling.
Further volatility regardless of the leadership result
There is a school of thought that argues that whoever wins the race to the premiership, once they are firmly ensconced at Number 10 Downing Street, they will shelve the hard line arguments on Brexit and begin looking for some kind of workable agreement with the EU. Tory members may be upset by this, but it will be too late then. Right now traders in GBP seem unconvinced by this argument. Regardless of the outcome, we can expect more volatility in sterling over the next few months as the new prime minister wakes up to reality, and considers whether they really can afford to deliver Brexit.