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Boris and the pound: Gray Report means further sell off for sterling

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The pound pile on has continued with sterling coming under even more pressure as political uncertainties have landed on top of economic worries, following a damning report into the Partygate scandal. The probe by senior civil servant Sue Gray has engulfed the UK government in a fiercer storm of criticism, as she pointed the finger of blame at the leadership for allowing a party culture to develop as the country was in lockdown and millions of citizens were in isolation.

As traders speculated over just how untenable Boris Johnson’s position as Prime Minister is, sterling fell further against the dollar and the euro before making up some ground. By mid-afternoon Wednesday the pound was trading at $1.249 down from $1.255 in morning trade, while against the euro sterling also fell before rebounding a little to trade around €1.173.

“By taking full responsibility there is speculation that Mr Johnson could still evade being ousted and a close eye will be kept on the number of letters from MPs calling for his resignation,” said Susannah Streeter, senior investment analyst with Hargreaves Lansdown. “Already the pound had been on the slide over fears about the fragility of the UK economy following much weaker than expected data showing a marked slowdown in business activity. This has led to expectation that the Bank of England will be forced to ease off on the accelerator when it comes to higher interest rates with the market now expecting fewer hikes.”

That monetary policy would be in direct contrast to the expected path of regular, although not extreme, higher hikes from the US Federal Reserve and comes as a new hawkish attitude has appeared at the European central bank, trends which are adding more strength to both the dollar and the euro.

FOMC minutes will play a role in sterling action Thursday

At time of writing, the market was still waiting on the FOMC minutes, likely to also have an impact on the future direction of GBP. Sterling has been losing ground versus the greenback since mid-February. It bounced off a six month low of 1.22 approx on 12 May and had managed a few sessions rallying against the dollar over the past week. That trend looks like it may be about to be broken again.

On the technical side, the US dollar was offered at the start of the week with risk currencies rising to their highest levels since the start of May. Risk was generally bid, which was lifting the likes of the AUD, NZD and GBP going into the Gray Report. The unwind in excessively long dollar positioning continued with majors notching gains Wednesday morning, building on last week’s rally. Clearance of the long-term 61.8% Fibonacci level had created an opening back to 1.2640 area.

Johnson government in defensive mode again

The British PM has long denied that he broke any of his country’s strict pandemic lockdown rules, but now photos have emerged of a party at his residence on November 13, 2020, in which Johnson is holding up a glass of what looks like booze near a table spread with wine and food.

The timing could prove disastrous for Johnson: the photos dropped just a day before the planned release of the Gray Report, an official investigation of the so-called “partygate” scandal. PMs who knowingly mislead Parliament are expected to resign, though there’s no guarantee that Johnson will concede to any wrongdoing of that sort. His supporters say he didn’t knowingly lie.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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